Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.

What is the Ohio Financial Institutions Tax (FIT)? The Top 10 Things You Need to Know.

Effective January 1, 2014 forward, all for profit financial institutions doing business in Ohio or otherwise having nexus with Ohio under the U.S. Constitution must report and pay the Ohio Financial Institutions Tax. The Ohio FIT is a tax on the privilege of doing business, similar to the Ohio Commercial Activity Tax (CAT), but is focused directly on financial institutions. Below are the top ten things you should know when considering a potential Ohio FIT issue.

  1. How Did the Ohio FIT Originate and Did the Ohio FIT Change Any Other Ohio Tax?

Amended Substitute House Bill 510 (the Bill) made the Ohio FIT effective January 1, 2014. Interestingly, the Bill repealed both the former Ohio Dealer in Intangibles Tax (DIT) and Corporation Franchise Tax (CFT) for tax years beginning January 1, 2014 and continuing. Now, taxpayers that qualify as dealers in intangibles (stockbrokers, mortgage lenders, securities dealers, finance and loan companies) are subject to the Ohio FIT, provided they fall under the FIT’s definition of a taxpayer. If such a taxpayer does not meet the FIT definition, that taxpayer is likely subject to the Ohio CAT.

  1. Who is Subject to the Ohio FIT?

There are three types of taxpayers that are generally subject to the Ohio FIT:

  • Bank Organizations;
  • Holding Companies of Bank Organizations; and
  • Nonbank Financial Organizations.

Under the FIT, a Bank Organization includes: (i) a national bank organized and operating under the National Bank Act; (ii) a federal savings association or federal savings bank chartered under 12 U.S.C. 1464; (iii) a bank, banking association, trust company, savings and loan association, savings bank, or other banking institution organized or incorporated under the laws of the U.S., any state, or a foreign country; (iv) any corporation organized and operating under 12 U.S.C. 611 (and following provisions); (v) any agency or branch of a foreign bank, as defined in 12 U.S.C. 3101; or (vi) an entity licensed as a small business investment company under the Small Business Investment Act of 1958.

The Ohio FIT defines Nonbank Financial Organizations as persons or entities, other than bank organizations or holding companies, which are engaged in business primarily as Small Dollar Lenders. A Small Dollar Lender is a person or entity that: (i) primarily loans to individuals; (ii) loans amounts of $5,000 or less; (iii) issues loans with terms of 12 months or less; and (iv) is not a Bank Organization, credit union, or captive finance company.

  1. Who is Not Subject to the Ohio FIT?

The following is a list of taxpayers that are generally not subject to Ohio FIT:

  • Insurance companies;
  • Captive finance companies;
  • Credit unions;
  • Institutions organized exclusively for charitable purposes;
  • Diversified savings and loan holding companies;
  • Grandfathered unitary savings and loan holding companies, any entity that was a grandfathered unitary savings and loan company on January 1, 2012, or any entity that is not a Bank Organization or owned by a Bank Organization and that is owned directly or indirectly by an entity that was a grandfathered unitary savings and loan holding company on January 1, 2012;
  • Institutions organized under the Federal Farm Loan Act or a successor of such an institution;
  • Companies chartered under the Farm Credit Act of 1933 or a successor of such a company;
  • Associations formed pursuant to 12 U.S.C. 2279c-1.
  1. What is the Tax Base for the Ohio FIT?

The Ohio FIT is imposed upon a taxpayer’s Ohio Equity Capital. Ohio Equity Capital is the taxpayer’s Total Equity Capital in proportion to the taxpayer’s gross receipts sitused in Ohio. A taxpayer’s Total Equity Capital is the sum of the following items for the taxable year: (i) common stock at par value; (ii) perpetual preferred stock and related surplus; (iii) other surplus not related to perpetual preferred stock; (iv) retained earnings; (v) accumulated other comprehensive income; (vi) treasury stock; (vii) unearned employee stock ownership plan shares; (viii) other equity components.

Biz&TaxHax Tip: For Ohio FIT purposes, a taxpayer may obtain its Total Equity Capital from the FR Y-9 (a financial statement that a financial institution holding company must file with the Federal Reserve Board) or from its Call Report (a consolidated report of condition and income that a bank organization must file with its federal regulatory agency). Alternatively, if the taxpayer does not have a FR Y-9 or Call Report, it must calculate its Total Equity Capital in accordance with GAAP.

Once a taxpayer has identified or calculated its Total Equity Capital for the taxable year, it multiplies that amount by its Ohio FIT Apportionment Factor for the taxable year to calculate Ohio Equity Capital. The Apportionment Factor for Ohio FIT is equal to the ratio of Ohio Gross Receipts for the tax year to Gross Receipts Everywhere for the tax year.

  1. How Does the Ohio FIT Situs/Source Gross Receipts?

The Ohio FIT situses/sources Gross Receipts based on the:

  • Location of benefit to the customer; or
  • Location of the taxpayer’s regular place of business.

So, Gross Receipts become Ohio Gross Receipts for purposes of Ohio FIT if either: (i) the taxpayer’s customer receives the benefit of the taxpayer’s services or funds provided in Ohio; or (ii) the taxpayer’s regular place of business is located in Ohio. The taxpayer’s Ohio Gross Receipts identified under this situsing/sourcing method are used as the numerator for the Apportionment Factor.

  1. What is the Tax Rate for the Ohio FIT?

Ohio FIT is imposed at the following rates, by Ohio Equity Capital:

  • First $200 million of Ohio Equity Capital: 0.008 (0.8%);
  • Ohio Equity Capital > $200 million, but < $1.3 billion: 0.004 (0.4%);
  • Ohio Equity Capital > $1.3 billion: 0.0025 (0.25%).
  1. Is there a Minimum Tax Amount for Ohio FIT?

Yes. Ohio FIT taxpayers must pay a minimum tax of $1,000.

  1. How Does an Ohio FIT Taxpayer File a Return and Pay the Tax?

Before filing any Annual Report or Estimated FIT Report, a taxpayer must register as a FIT taxpayer by:

  • Registering under the reporting person/entity and listing all of the consolidated members; and
  • If two or more entities are consolidated for purposes of filing a FR Y-9 or Call Report, the financial institution for FIT consists of all entities included in the FRY-9 or Call Report.

Taxpayers are required to file any Ohio FIT Annual Report or Estimated FIT Report and make any payment electronically through the Ohio Business Gateway (OBG).

  1. When are Ohio FIT Returns and Payments Due?

The Ohio FIT Annual Report is due October 15th of the tax year, with no available extension. The Tax Year is the Annual Report year in and for which the tax is paid. The Taxable Year is the calendar year preceding the year in which the Annual Report is filed and the tax paid. The taxpayer’s tax base (Total Equity Capital, Ohio Equity Capital, Apportionment Factor) is calculated from the activity/capital existing during the Taxable Year.

An Ohio FIT taxpayer must make estimated quarterly payments on the dates listed below, and as follows:

  • January 31st – 1/3 of the tax or minimum tax of $1,000, whichever is greater;
  • March 31st – 1/2 of the remaining balance of tax due;
  • May 31st – second 1/2 of the remaining balance of tax due.
  1. How Can a Taxpayer Obtain a Refund for Overpayment of Ohio FIT?

To claim a refund for Ohio FIT, file Form FIT REF Application for Financial Institutions Tax Refund.

Biz&TaxHax Tip: A taxpayer does not need to file Form FIT REF if the original Annual Report reflects the overpayment of tax. But, if a taxpayer must file an Amended Annual Report and it shows a refund due, the taxpayer must file Form FIT REF also to claim the refund.

Based on the above, there are a couple other important considerations relating to Ohio FIT: (1) Ohio FIT has a broader nexus standard (it looks a lot like economic nexus) than the predecessor Corporation Franchise Tax, meaning it will likely apply to more taxpayers; and (2) some entities (such as small dollar lenders or community banks) may be mistakenly paying Ohio CAT instead of Ohio FIT.

As always, in considering your potential Ohio FIT reporting and payment obligations, as well as any planning, it is best to consult an experienced Ohio tax attorney or Ohio tax consultant. An Ohio tax lawyer or Ohio tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Ohio FIT compliance and planning needs.

Ohio Supreme Court Adds Difficulty for Out-of-State Retirees or Executives Seeking to Disclaim Ohio Domicile for Income Tax Purposes

Establishing Domicile Outside Ohio: Affidavit and Statutory Presumption Pre-March 23, 2015

When former Ohio residents decide to move outside Ohio, they often seek to maintain some contact with Ohio, yet establish tax domicile in their new state of residence. There are a few common (often interrelated) reasons that Ohioans decide to leave the state, such as:

1. Retirement (often to Florida, to avoid cold, snowy Ohio winters);

2. Work (as part of a transfer, or perhaps an executive who performs most of his/her duties outside Ohio); and

3. Obtaining a lower (or zero) state income tax rate (often high or fixed income individuals, such as executives or retirees).

Until recently, a retiree or executive moving his or her primary residence from Ohio to another state could more easily maintain some contact with Ohio, while also establishing tax domicile outside Ohio. This way, the taxpayer could obtain an income tax benefit (or at least avoid having tax reporting and payment obligations in both the new state and Ohio), and keep some ties with his/her former home state.

To ensure tax domicile outside Ohio and obtain the above-noted benefits, the taxpayer could file an Affidavit of Non-Ohio Domicile with the Ohio Department of Taxation, attesting that during the tax year he/she was not domiciled in Ohio because he/she had:

1. Fewer than 213 (effective 3/20/2015; previously, fewer than 183) Ohio contact periods; and

2. An abode in a state outside Ohio.

Under Ohio law, as long as the taxpayer’s Affidavit did not contain a false statement, this filing created an irrebuttable presumption that the taxpayer was not domiciled in Ohio during the tax year. See R.C. 5747.24(B)(1).

March 23, 2015 Forward: Ohio Supreme Court Decision Invalidates Affidavit Presumption of Non-Ohio Domicile

The recent Ohio Supreme Court decision in Cunningham v. Testa, Slip Opinion No. 2015-Ohio-2744, basically rendered this statutory presumption of non-Ohio domicile (where a taxpayer files the Affidavit of Non-Ohio Domicile) ineffective. In Cunningham, the Court reasoned that the Affidavit must still be supported by facts and circumstances that would withstand the common law test of domicile. So, it is no longer enough to simply file the Affidavit attesting that the taxpayer has fewer than 183 Ohio contact periods for the year and is not domiciled in Ohio. One needs to actually review the taxpayer’s relevant facts and circumstances related to determining domicile under the common law rule.

Under common law, domicile is a question of intent–whether the taxpayer intends to remain in a jurisdiction permanently, or at least indefinitely–based on all relevant facts and circumstances. A non-exhaustive list of facts and circumstances relevant to determining domicile include:

1. Filing federal income tax returns (address listed on federal returns);

2. Voter registration;

3. Automobile registration;

4. Driver’s license;

5. Location of spouse and children;

6. Mailing address/address where mail is received;

7. Various exemption/credit/etc. application filings (in Cunningham, the taxpayer’s had claimed a homestead exemption application for their Cincinnati home prior to later filing the Affidavit of Non-Ohio Domicile, which was inconsistent);

8. Courts will also look to the place where an individual was: born, raised, educated, married, resided for significant time, etc.

Effectively, following the Cunningham decision it appears that a taxpayer can still use the Affidavit, but it is important to do a self-review of factors to ensure that the total facts and circumstances support the taxpayer’s Affidavit claiming non-Ohio domicile. In other words, it seems that a taxpayer can’t simply rest on the fact that he has less than 183 contact periods in Ohio and has another residence outside Ohio during the tax year to claim no Ohio domicile (as many previously believed would suffice) – the weight of all relevant facts and circumstances must support the position as well.

Summary & Biz&TaxHax Tip

In summary, the Cunningham decision seems to provide the Ohio Department of Taxation significant authority and leverage to require taxpayers filing the Affidavit to further support domicile outside Ohio by the weight of common law factors. So, unless and until the Ohio Legislature addresses this Ohio tax domicile issue, Cunningham appears to be the controlling rule. Accordingly, it is important for former Ohioans (or those considering a move outside Ohio) to consult an experienced Ohio tax attorney or consultant to ensure proper tax domicile review and planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in evaluating your specific facts and circumstances to support non-Ohio domicile under common law, and filing the Affidavit to obtain the appropriate tax results.

Tax Tips for Entrepreneurs and Business Owners Part 3: The Home Office Expense Deduction

The Tax Tips for Entrepreneurs and Business Owners series continues with this third article, concentrated on the home office expense deduction. This article focuses on the importance of the home office deduction for the entrepreneur or small business owner. The below discussion includes an explanation of the home office expense deduction, the test to qualify for and available methods to claim the deduction, and some key tips.

What is the Home Office Expense Deduction and How Can My Small Business Qualify?

The home office deduction allows a small business owner or entrepreneur to reduce tax liability based on expenses related to business use of a portion of his home. To qualify, the small business owner or entrepreneur must: (1) Regularly & Exclusively Use of part of his home as his (2) Principal Place of Business.

Generally, if a business owner regularly–say a few hours per day–works in a space solely dedicated as his home office, he should meet the regular and exclusive use requirements. But, this is a facts and circumstances based test, subject to many pitfalls. For instance, assume the area you utilize as a home office also contains gym equipment that you use to exercise. This could cause you to fail the exclusive use portion of the test, and lose the home office deduction.

Usually, if a business owner or entrepreneur at least uses his home office to complete administrative or management tasks without substantially using any other fixed office to do them, he can satisfy the principal place of business element. So, salespeople, tradespeople, or professional service providers (e.g., people who do most of their income-producing activity outside the home) are normally able to meet the principal place of business test by at least doing the administrative and management duties at the home office. Again, though, this determination depends heavily on facts and circumstances. So, overall, it is essential to consult with an experienced tax lawyer to review your specific situation before claiming the home office expense deduction.

Which Office Expenses Can I Deduct Related to My Small Business?

An entrepreneur or small business owner qualifying for the home office deduction may cut his tax bill by deducting the following types of expenses:

  1. Mortgage Interest;
  2. Insurance;
  3. Utilities;
  4. Repairs; and
  5. Depreciation.

These categories of expenses are important when a taxpayer uses the regular, or actual expenses method for computing the home office deduction. But, many entrepreneurs or small business owners prefer to calculate the home office deduction using the simplified method, as the record keeping requirements are less burdensome. An explanation of the home office expense deduction methods follows.

How Can I Claim the Home Office Expense Deduction?

  1. Regular/Actual Expenses Method. This option calculates the home office expense deduction based on the proportion of square feet the business owner’s home office bears to the total square footage of the home. As an example, if the home office is 200 square feet and the total square footage of the home is 1600, the deductible portion of the home is 12.5% (200/1600). Once you identify the deduction percentage, add up the items from each category of deductible expenses (see above) and multiply that amount by the deductible percentage to compute the amount of the deduction.
  2. Simplified Method. The IRS started allowing a simplified option for the 2013 tax year forward. Under this method, the business owner can simply multiply the allowable home office square footage (up to 300 square feet) by the defined rate (for 2014, $5 per square foot) to compute the home office expense deduction. So, if an entrepreneur used 200 square feet of his home for solely business purposes during 2014, his home office deduction would be $1,000 (200 x $5).

BizAndTaxHax Tips: Importantly, assuming you utilize the regular method, if you include the depreciation on your home as a deductible expense and later sell your home at a profit, you must pay capital gains tax on the total amount of depreciation deductions you claimed. Also, it is significant to note that the amount of the home office expense deduction is limited. Your deducted home office expenses may not exceed the amount of income attributable to your business–meaning you cannot use your home expenses to create a tax loss to shelter your income. Finally, the home office expense deduction varies for certain different types of businesses or industries. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain specific advice concerning deductible expenses for your home office.

An experienced tax lawyer can help you determine whether your home office qualifies for the home office expense deduction, and assist with keeping the required documentation to support the deduction. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.