College Tax Credits: Parent & Student Primer

Parents and students, by now, you’re certainly in the full chaos of the academic year – spending that hard-earned money to help your child get the education necessary to pursue a great future career. Before too long, you’ll also be working through the challenges of gathering information and documents for tax return filing season – and by then you’ll be keenly aware of just how much you’re spending to obtain that all-important college degree. Likewise around tax filing time, you will probably be searching for and considering what summer jobs, internships, or other opportunities may be available to help pay for or defray some of the cost of college now, or at least help bolster your child’s prospects for future employment to repay college debt.

While the cost of college education can definitely be burdensome, and tax season is a drag for most, there are some federal tax provisions that can help relieve some of that burden and make you excited (ok, maybe just less anxious!) about tax season. That’s why this article is dedicated to summarizing the most useful information regarding available college tax credits for parents and students.

Biz&TaxHax Tip: Biz&TaxHax hopes this article proves useful in your quest to save money on, and make the most of, your education. In that spirit, we also want to be sure to introduce you to our friends and colleagues at Nunan Vogel Rowe (NVR), who are experts in career coaching, especially college-to-career coaching. Biz&TaxHax likes to team with like-minded professionals to bring you the most relevant, useful information to help you plan and find solutions to your challenges. NVR is certainly a golden resource for students and their parents navigate the key planning and decision-making that makes all the difference in future career prospects. To do this, NVR’s leaders draw on their experiences as big-company executives with strong backgrounds in identifying, recruiting, evaluating, and developing the best talent in industry. Simply put, they’ve been there and done that one-thousand times over, and can help you tremendously.

Available College Tax Credits & General Requirements

There are two college tax credits available, these are the:

  1. American Opportunity Tax Credit; and
  1. Lifetime Learning Credit.

Each of these education tax credits has its own specific requirements, but both share the following general requirements:

  1. You, your dependent or a third party paid qualified education expenses during the tax year for,
  1. An eligible student who was enrolled at an eligible educational institution, and
  1. You, your spouse, or a dependent listed on your tax return is the eligible student.

Generally, these education tax credits exist for eligible students attending an eligible college, university, or vocational school, and the amount of credit allowed is limited based on the amount of eligible expenses and taxpayer’s income level. Although a particular taxpayer will often qualify for both the American Opportunity Tax Credit and the Lifetime Learning Credit, a taxpayer may only claim one of these credits for a given tax year.

 American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit is available to any taxpayer who pays qualified expenses for an eligible student. A taxpayer, the taxpayer’s spouse, or the taxpayer’s dependents can all be eligible students, and the American Opportunity Tax Credit allows a credit for each eligible student. A substantial number of taxpayers who are eligible for the American Opportunity Tax Credit will qualify for the $2,500 maximum credit amount, which is a per year, per student maximum. But, it is important to keep in mind that a taxpayer can only claim this credit for four tax years for each eligible student, and only for eligible students who have not completed their first four years of college education prior to 2016.

Biz&TaxHax Tips: In considering whether you may be able to claim the American Opportunity Tax Credit, the following are important points to keep in mind, but you should always contact an experienced tax attorney or tax consultant to fully discuss your facts and circumstances and help make this determination:

  1. Qualified Education Expenses: Tuition, fees, and certain other expenses that are required for enrollment or attendance at an eligible educational institution constitute qualified education expenses. Common other expenses that qualify are expenses for books, supplies, and equipment that are needed for a course of study. Some types of expenses that do not qualify are: insurance, medical expenses (including student health fees), room and board, transportation, or similar personal, living, or family expenses.
  1. Credit Amount: To claim the full $2,500 tax credit, your qualified expenses for an eligible student must be $4,000 or more (and you must not be limited by income-level).
  1. 40% Refundable: The American Opportunity Tax Credit is 40% refundable, meaning that even if you owe no federal income tax, you may be able to claim up to $1,000 in refund for each eligible student (again, subject to income-level limits and the amount spent on qualified educational expenses).
  1. Income Limits: For 2016, single taxpayers with a modified adjusted gross income (MAGI) of $80,000 or less, and married taxpayers filing jointly with a MAGI of $160,000 or less, may claim the full $2,500 credit (again, assuming enough qualified educational expenses to support it). This credit phases out as the various types of taxpayers’ incomes rise above these levels, and the credit vanishes when MAGI is $90,000 (single, head of household, some widows and widowers) or $180,000 (married filing jointly).

Lifetime Learning Credit

Undergraduate and graduate students alike are eligible for the Lifetime Learning Credit, which provides a tax benefit of up to $2,000 per tax return (rather than per student, like the AOTC). Another important distinction between the Lifetime Learning Credit and the AOTC is that the Lifetime Learning Credit is not refundable, meaning that a taxpayer with no tax liability will not receive a refund for the amount of this tax credit that he or she is eligible to claim. But, one positive difference with the Lifetime Learning Credit is that a student need not be a half-time student at the eligible educational institution to qualify; rather, the student can be pursuing a course of study part-time to maintain or improve job skills or as part of a degree program at an eligible educational institution.

Biz&TaxHax Tips: If you are evaluating whether you may qualify to claim the Lifetime Learning Credit, these are some helpful tips to discuss with a tax lawyer or tax consultant, who can help you analyze eligibility and claim the credit:

  1. Qualified Education Expenses: Qualified education expenses include tuition and fees required for enrollment or attendance at the eligible educational institution, and other fees required for coursework there. Any additional expenses do not qualify.
  1. Credit Amount: The maximum amount of the credit is $2,000, and the credit is calculated as a percentage (20%) of eligible expenses for all eligible students listed on the return. So, to claim the maximum credit, a taxpayer must have paid at least $10,000 in qualified expenses for the year.
  1. Income Limits: Single taxpayers with MAGI of $55,000 or less, and married couples filing jointly having a MAGI of $111,000 or less, may claim the full Lifetime Learning Credit for 2016. The credit diminishes as income levels rise, and it vanishes at $65,000 (single, head of household, some widows and widowers) and $131,000 (joint filers) of MAGI.

Other Education-Related Tax Benefits

Even if you do not qualify for one of the college tax credits, you may be able to benefit from one of the following other education-related tax benefits:

  1. Grants for Scholarship and Fellowship, which are usually tax-free if they are used to pay for tuition, required fees, books, and other course materials, but are taxable if applied to room, board, research, travel, or other expenses.
  2. Deduction for Tuition and Fees
  3. Deduction for Student Loan Interest (up to $2,500/year, depending on amount of interest paid and income level).
  4. College Savings Bonds, the interest on which is generally tax-free depending on the taxpayer’s income level, the time of purchase, and taxpayer’s age at the time of purchase.
  5. QTPs (Qualified Tuition Programs) such as a 529 Plan.

As always, for parents and students considering eligibility for college tax credits like the American Opportunity Tax Credit and Lifetime Learning Credit, or other education-related tax benefits, as well as related planning, reporting and payment obligations, it is best to consult an experienced tax attorney or tax consultant. A tax lawyer or 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 tax compliance and planning needs.

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The Kentucky Angel Investment Tax Credit (KAITC): Top 5 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

As noted in Biz&TaxHax’s prior article, outlining the Top 5 Benefits of the Kentucky Small Business Tax Credit, Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. The second of this series, this article highlights the top 5 benefits the Kentucky Angel Investment Tax Credit provides for Kentucky investors, entrepreneurs, start-ups, and small businesses. The Kentucky Angel Investment Tax Credit has wide-ranging application, offering the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. The KAITC Incentivizes Investment in Kentucky Start-Ups and Small Businesses.

The stated purpose of the Kentucky Angel Investment Tax Credit is to encourage qualified individual investors to make capital investments in Kentucky small businesses, create additional jobs, and promote the development of new products and technologies in Kentucky. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. The KAITC provides additional incentive for investors, both in Kentucky and those in other states, to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses.

  1. Broad Eligibility: The Requirements for a Qualifying Investor, Qualified Investment, Qualified Small Business, and Qualified Activity Encompass a Wide Base.

The KAITC is available to Qualified Investors making Qualified Investments in Qualified Small Businesses that are conducting Qualified Activities. That sounds like a lot of qualifiers. But, in reality, the definitions of the terms are not overly restrictive. Below is a summary of the relevant qualifiers:

Qualified Investor: (1) an individual, accredited investor according to Reg. D of the U.S. Securities and Exchange Commission, who (2) holds no more than 20% ownership in and is not employed by the Qualified Small Business prior to making a Qualified Investment in the business, (3) is not the parent, spouse, or child of someone who would fail to satisfy requirement # 2, (4) seeks a financial return on the Qualified Investment, and  (5) has become a Kentucky Economic Development Finance Authority (KEDFA) certified Qualified Investor.

Qualified Investment: (1) a minimum cash investment of $10,000 made by a Qualified Investor in a Qualified Small Business, (2) offered and executed in compliance with all applicable state and federal securities laws and regulations, (3) in exchange for equity interest in the Qualified Small Business, (4) having been pre-approved by the KEDFA as a Qualified Investment.

Qualified Small Business: (1) a legal entity registered and in good standing with the Kentucky Secretary of State and otherwise maintaining all state licenses and other permits required, (2) comprised of 100 or fewer full-time employees, (3) actively and primarily conducting (or planning to conduct upon receiving a Qualified Investment) a Qualified Activity within Kentucky, (4) maintaining more than 50% of its assets, operations, and employees within Kentucky, that (5) either (a) has a net worth of $10 million or less, or (b) has had $3 million or less in net income after federal income taxes for each of the two preceding fiscal years, which (6) has not received investments qualifying for more than $1 million in total angel investor tax credits, and (7) has been pre-certified as a Qualified Small Business by the KEDFA.

Qualified Activity: A knowledge-based activity related to the Office of Entrepreneurship focus areas that include, but are not limited to: Bioscience; Materials Science and Advanced Manufacturing; Environmental and Energy Technology; Information Technology and Communications; and Health and Human Development.

If you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there is a good chance your company could become a Qualified Small Business eligible to receive a Qualified Investment from a Qualified Investor. An experienced Kentucky tax lawyer or Kentucky tax consultant can help you navigate the process of applying to become a Kentucky Qualified Small Business, opening your company up to a larger pool of capital sources. Additionally, if you are an investor wishing to invest in Kentucky small businesses, a Kentucky tax attorney or Kentucky tax consultant can help you apply to become a Qualified Investor and take advantage of the Kentucky Angel Investment Tax Credit.

  1. Generous Credit Rate and Up to $200,000 in Credit Each Year.

The Kentucky Angel Investment Tax Credit provides Qualified Investors a credit of up to 50% (in enhanced incentive counties) or up to 40% (all other counties) of their Qualified Investments. Depending on the amount of the Qualified Investment and the location of the Qualified Small Business, the KAITC can provide up to $200,000 of tax benefit per calendar year.

  1. Carryforward of Unused Credits.

A credit approved under the KAITC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the Qualified Investor may carry forward the remaining amount of credit to offset against tax due for up to the next 15 years. This is important, as often times entrepreneurs, start-ups, and small businesses may not have significant taxable income and tax liability in initial years. This 15 year carry forward enables a Qualified Investor in a Kentucky Qualified Small Business to recognize the benefit of the Kentucky Angel Investment Tax Credit in later years when their investment may be generating more taxable income and thus the investor may have more tax liability.

Biz&TaxHax Tip: The KAITC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to 15 years.

The KAITC is transferrable for out-of-state investors, meaning investors who are located outside Kentucky, who may not have Kentucky tax liability, can still reap the benefit of this tax credit. To do so, a nonresident/out-of-state Qualified Investor may sell its Kentucky Angel Investment Tax Credit to a Kentucky taxpayer and that Kentucky taxpayer may use the credit to offset Kentucky tax liability.

Biz&TaxHax Tip: A nonresident Qualified Investor who wishes to transfer the KAITC to a Kentucky taxpayer must follow certain procedures outlined by the Kentucky Department of Revenue. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper transfer of the Kentucky Angel Investment Tax Credit.

As always, for investors, entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Angel Investment Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky 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 Kentucky tax compliance and planning needs.

The Kentucky Small Business Tax Credit (KSBTC): Top 5 Benefits to Kentucky Entrepreneurs, Start-Ups, and Small Businesses

Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. This article, focused on the Kentucky Small Business Tax Credit, is the first in a series of Biz&TaxHax articles that will outline some of the key benefits that exist in Kentucky for entrepreneurs, start-ups, small businesses, and investors. The Kentucky Small Business Tax Credit has broad application to Kentucky companies, providing the following top five benefits to Kentucky small businesses, start-ups, and entrepreneurs:

  1. Broad Eligibility: Many Companies Can Qualify for the Kentucky Small Business Tax Credit.

Assuming other requirements are met, the KSBTC is available to for-profit companies with 50 or fewer full-time employees. Additionally, this tax credit includes businesses in the retail, service, construction, manufacturing, and wholesale industries. This means that if you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there’s a good chance you could qualify for the Kentucky Small Business Tax Credit.

  1. Rewards Investment in New Kentucky Jobs and New Kentucky Equipment and Technology.

Entrepreneurs and start-ups that are on their way to becoming established small businesses, and small businesses that are growing into larger ones, are continuously purchasing additional technology and equipment and hiring new team members. The good news is, the Kentucky Small Business Tax Credit rewards Kentucky entrepreneurs, start-ups, and small businesses for those very actions: hiring new employees and buying new technology and equipment.

Biz&TaxHax Tip: It is great the KSBTC focuses on rewarding expenses that Kentucky companies are already incurring, but it is important to note that there are specific requirements and thresholds for qualification relating to: (1) eligible employees hired (must be new, full-time position; certain requirements for wages paid and hours worked); (2) qualifying equipment and technology (does not include real property, consumable supplies, or inventory (generally); expenditure of at least $5,000); and (3) the timing of the new hires and equipment/technology expenses (generally, a company must have hired an employee for at least one new full-time position and invested at least $5,000 in qualifying new equipment or technology in the past 24 months), to name a few. An experienced Kentucky tax attorney or Kentucky tax consultant can help navigate these specific requirements to determine if your company is eligible for the Kentucky Small Business Tax Credit.

  1. Up to $25,000 in Credit Each Year.

The KSBTC provides a credit against tax liability for each calendar year that a Kentucky entrepreneur, start-up, or small business qualifies. Depending on the number of eligible new positions created and the amount of investment in qualifying technology or equipment, the Kentucky Small Business Tax Credit ranges from $3,500 up to $25,000 per calendar year.

Biz&TaxHax Tip: Given the timing requirements noted in the tip to #2 above, it is a good idea to discuss your hiring and investment plans with your business attorney or tax lawyer early and often. If your timing for hiring and investment is flexible from a business standpoint, your tax attorney or business lawyer can help you plan for maximizing the Kentucky Small Business Tax Credit in a particular year or over a period of years.

  1. Carryforward of Unused Credits.

A credit approved under the KSBTC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the taxpayer may carry forward the remaining amount of credit to offset against tax due for up to the next five years. This is important for entrepreneurs, start-ups, and small businesses, as often times in the initial years they are in expenditure and growth mode, and may not have significant taxable income and tax liability. This five year carry forward enables small businesses, start-ups and entrepreneurs to recognize the benefit of the Kentucky Small Business Tax Credit in later years when they may generate more taxable income and have more tax liability.

Biz&TaxHax Tip: The KSBTC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to five years.

  1. Broad Applicability to Different Tax Liabilities.

The KSBTC may be used by a taxpayer to offset tax liability on a Kentucky individual income tax return, limited liability entity tax return, or corporation income tax return. So, the KSBTC’s broad applicability benefits a wide range of taxpayers, from entrepreneurs and pass-through entity owners who may be primarily concerned with the individual income tax and limited liability entity tax, to small businesses that may be subject to the corporation income tax.

Biz&TaxHax Tip: Depending on a particular taxpayer’s structure (such as sole proprietor, partnership, limited liability company, S corporation, C corporation) and other factors, the taxpayer may be subject to one or more of the taxes noted in #5 above. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper tax compliance and utilization of the Kentucky Small Business Tax Credit.

As always, for entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Small Business Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky 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 Kentucky tax 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.

Tax Tips for Entrepreneurs and Business Owners – Part 4: The Business Start-Up Cost Deduction

The fourth article in the Tax Tips for Entrepreneurs and Business Owners series focuses on the business start-up cost deduction. This article highlights the importance of the business start-up deduction for entrepreneurs. This article briefly explains the business start-up cost deduction, the general test to qualify for the deduction, and some key tips.

What is the Business Start-Up Cost Deduction and How Can My Company Qualify?

The business start-up cost deduction allows an entrepreneur to take a current tax deduction for certain expenses incurred prior to, and for the purpose of, beginning the company. The deduction is limited to $5,000, and phases out on a dollar-for-dollar basis once the total qualifying start-up and organizational costs exceed $50,000. The entrepreneur must then amortize–or deduct pro-rata over a specified period of time–the remaining eligible start-up and organizational costs.

To qualify, the entrepreneur must have incurred eligible: (1) Start-Up Costs; or (2) Organizational Costs necessary to begin an active trade or business. Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs are the expenses associated with creating a corporation or partnership.

Which Costs Qualify as Deductible Start-Up or Organizational Costs?

Qualifying Start-Up Costs include:

  1. Analyses or Surveys of potential markets, products, labor supply, transportation facilities, etc.
  2. Advertisements for the opening of the business.
  3. Salaries and Wages for employees who are being trained and their instructors.
  4. Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  5. Salaries and Fees for executives and consultants, or for similar professional services.
  6. Investigative costs incurred as part of a general search for or initial evaluation a business to be acquired/purchased. These are the costs that help the entrepreneur decide whether to purchase the particular business.

BizAndTaxHax Tips: Start-up costs do not include deductible interest, taxes, research and experimental costs, or costs incurred as part of attempting to purchase a specific business. These expenses must be capitalized instead.

Qualifying Organizational Costs include:

  1. The cost of Temporary Directors.
  2. The cost of Organizational Meetings.
  3. State Incorporation Fees or Filing Fees.
  4. The cost of Legal Services for organization of the company, such as negotiation and preparation of the company’s organizing agreement.
  5. The cost of accounting services incident to organization of the business.

BizAndTaxHax Tips: The following expenses must be capitalized, rather than currently deducted and amortized: costs for marketing, issuing, and selling stock, securities, or company interests (such as commissions, professional fees, and printing costs); costs related to acquiring assets for the business or transferring assets to the business; costs for admitting or removing partners, shareholders, or members, other than at the time the company is first organized; costs of drafting an agreement concerning the operation of the business, including a contract between a partner, member, or shareholder and the company. These expenses must be capitalized.

Determining whether your company’s start-up or organizational costs are currently deductible and amortizable, or rather must be capitalized, is a specific factual and circumstantial analysis. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain advice concerning deductible start-up or organizational costs for your newly formed business. An experienced tax lawyer can help you determine whether your start-up or organizational costs qualify for current deduction, and assist with electing the deduction and keeping the required documentation to support it. 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.

Tax Tips for Entrepreneurs and Business Owners – Part 2: The Section 179 Expense Deduction

This is the second article in the Tax Tips for Entrepreneurs and Business Owners series, which highlights a few of the frequent federal tax audit issues for business owners and provides some tips for avoiding federal tax compliance problems. This article focuses on the Section 179 expense deduction and its importance for the entrepreneur or small business owner.

What is the Section 179 Expense Deduction?

Section 179 of the Internal Revenue Code provides a very helpful tool for small business owners and entrepreneurs. Section 179 allows a business to expense–meaning claim a current tax deduction rather than depreciating over a number of years–certain property purchased during the tax year. This is very important for start-ups and small businesses, because it enables the entrepreneur or small business owner to: (i) purchase a useful or necessary business asset to help generate revenue; and (ii) save cash on current tax liability. As many readers will appreciate, saving cash for reinvestment and acquiring equipment or property needed to build revenue are essential for growing a new venture or scaling a small business. So, how can you determine whether the property you bought for your business qualifies for Section 179 expensing?

What Qualifies for Section 179 Expensing?

To qualify for Section 179 deduction, your property must be:

  1. Eligible Property; and
  2. Purchased for Business Use.

Generally, eligible property includes tangible personal property (such as machinery and equipment, vehicles, computers, telephones, office furniture, etc.), certain other tangible property, off-the-shelf computer software, and some other specific property. The determination of whether a particular piece of property qualifies for Section 179 expensing can be very technical and complex, and there are numerous restricted types of property that will not be eligible for this special deduction. So, you should consult with a tax attorney and your accountant before claiming the Section 179 deduction as to your business property purchases for a given year.

As noted above, property must be purchased for business use to be eligible for Section 179 expensing. Property is considered to be for business use when more than 50% of its use will be in business operations during the year it is placed in service. If property is used for both business and nonbusiness purposes, the business owner can take a proportionate deduction under Section 179 (provided, of course, that the business use is more than 50%). To calculate the proportionate Section 179 deduction, multiply the cost of the property by the percentage of business use and use the resulting amount to determine your Section 179 deduction.

What is the Dollar Limit on Section 179 Deductions?

Usually, the purchase price of qualifying property is the amount for Section 179 expensing (subject to any business-personal use apportionment, of course). But, Section 179 also includes dollar limits and an income limits on the deduction, which vary based on the facts and circumstances. For instance, certain property (such as passenger automobiles) is subject to specific dollar limitations for Section 179 expensing. Based on recent extension by Congress, though, the 2014 general dollar limitation for Section 179 deductions is $500,000. This means that a business owner can deduct up to $500,000 of qualifying property purchases under Section 179 for this year. Finally, it is important to note that the Section 179 deduction is reduced dollar for dollar to the extent the cost of eligible property purchased for the year exceeds $2 million. So, if you purchased qualified property for a total cost of $2.5 million and placed it in business service in 2014, the Section 179 deduction would be unavailable.

BizAndTaxHax Tips: Significantly, unless Congress again acts to extend the increase ($500,000), the dollar limit on Section 179 expensing is set to fall back to $25,000 for tax year 2015. So, if you made large capital asset purchases in 2014, it is important to coordinate with a tax lawyer and your accountant to properly expense the eligible property under Section 179 at return filing time. Otherwise, you may miss out on significant current tax savings if Congress does not extend the $500,000 deduction limit for 2015.

An experienced tax lawyer can help you determine whether particular property qualifies for Section 179 expensing, 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.

Tax Tips for Entrepreneurs and Business Owners – Part 1: The Business Vehicle Expense Deduction

As 2014 draws to a close, taxpayers should begin reviewing their annual income and expenses in preparation for filing required income tax returns and paying tax due. Importantly, entrepreneurs and small business owners should be especially diligent in this process, as there are numerous audit traps for the unwary Schedule C filer. This is the first in a series of articles that will highlight a few of the frequent federal tax audit issues for business owners, and provide some tips for avoiding federal tax compliance problems. This article focuses on the business automobile expense deduction as a potential pitfall for the unfamiliar, and offers tips for compliance.

Business Vehicle Expense Deduction 

Awareness of some typical audit traps is key to ensuring federal tax compliance, especially for entrepreneurs and start-ups who may be new to properly accounting for deductible expenses. One frequently audited area is the business automobile expense deduction. Costs associated with a business owner’s use of a vehicle for business purposes are tax-deductible, which is a very helpful savings tool. But, the federal tax rules for deducting business related automobile expenses are specific, making compliance difficult for many.

There are two methods for claiming deductible business vehicle expenses:

  1. Actual Expenses, Plus Depreciation Method. The business owner must record and document all deductible automobile-related expenses incurred for the business vehicle during the year. The following costs are deductible in proportion to the amount of business miles driven: gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments). Additionally, all business-related tolls and parking fees are deductible.
  2. Standard Mileage Rate Method. The business owner may deduct a percentage  (the standard mileage rate) of each business mile driven, plus all business-related tolls and parking fees. For 2014, the standard mileage rate is 56 cents per business mile travelled.

There are very specific rules that determine which of the above business vehicle expense deduction methods are available to a particular business owner. Certain facts and circumstances trigger different rules.

For instance, to qualify to use the standard mileage method, a business owner must utilize that method in the first year the vehicle is used in business activity. Additionally, the standard mileage deduction is not available to business owners who have used accelerated depreciation in prior years, or expensed the vehicle under Section 179 of the Internal Revenue Code. Moreover, only business-use mileage is tax-deductible, meaning proper business-to-personal mileage allocation is essential for a vehicle that is used for both purposes. Importantly, these examples are not exclusive. So, it is important to consult with your tax attorney and accountant before implementing a particular business vehicle expense deduction method for your business.

Biz&TaxHax Tips: Regardless of which deduction method a business owner uses, one thing is certain: documentation is king in surviving an audit. The best way to properly document business automobile expenses to support deduction is to maintain a detailed mileage log (listing the date, business purpose, departure location, destination, mileage, and before and after vehicle odometer reading) and records of actual expenses (invoices, receipts and proof of payment for: gasoline, oil changes, maintenance and repairs, tires, etc.) for each vehicle used in the business for the year. This way, it is less likely that you will make any mistakes in claiming deductible automobile expenses on your tax return and you will be in a much better position to show that your return was accurate, if audited.

An experienced tax lawyer can help you determine which deduction method is available and best for your business, 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.