General News

Tax and Business Alert? Archive

HOUSE BILL 66

OUTLINE OF MAJOR PROVISIONS

Unless otherwise noted, the following are effective as of June 30, 2005.

A. COMMERCIAL ACTIVITY TAX (CAT)

1. Imposition, Rate, Rate Adjustments and Nexus Standard

  • CAT commences July 1, 2005 on persons with taxable gross receipts sitused to Ohio.
  • The tax is an annual excise tax for the privilege of doing business in Ohio.
  • The tax is owed and payable by the seller.
  • The CAT rate is 0.26% (.0026) of the taxpayer?s taxable gross receipts.
  • For the six month ?initial period? of July 1, 2005 through December 31, 2005, the CAT will be $75 plus .06% of the taxable gross receipts in excess of $500,000.
  • The tax on the first $1 million in gross receipts is limited to $150.
  • Persons with $150,000 or less in annual gross receipts are not subject to CAT.
  • CAT is phased-in over five years, at the same time the Corporate Franchise Tax and Tangible Personal Property Tax are being phased-out.
  • The tax rate will be adjusted up or down depending on the amount of revenue collected from CAT during certain periods.
  • Persons having a substantial connection with Ohio (?nexus?) will be subject to the tax.
  • A person has nexus with Ohio if any of the following applies (1) they own or use capital in Ohio; (2) they are authorized to do business in Ohio; (3) they have property or payroll in Ohio of at least $50,000; (4) they have taxable Ohio gross receipts of at least $500,000; and (5) 25% of the person?s total property, total payroll or total sales are in Ohio.
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2. Definitions of ?Person?, ?Taxpayer? and ?Excluded Person?

  • ?Person? for CAT purposes includes individuals, corporations, partnerships, LLC?s and LLP?s, S corporations, estates, trusts, clubs, disregarded entities, joint ventures, associations and societies.
  • A ?taxpayer? is defined as any person except an ?excluded person?.
  • ?Excluded persons? include nonprofit organizations, public utilities, financial institutions and dealers in intangibles.
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3. ?Gross Receipts?, ?Excluded Gross Receipts? and Situsing of Gross Receipts

  • ?Gross receipts? are defined as the total amount realized by a person without a deduction for cost of goods sold.
  • ?Gross receipts? also include the fair market value of any property or services received.
  • Debt transferred or forgiven as part of consideration is also considered a gross receipt for CAT purposes.
  • ?Gross receipts? would be calculated on an accrual basis unless the person is not required to use that basis for federal income tax purposes.
  • ?Excluded gross receipts? not subject to the CAT include (1) interest income except interest on credit sales; (2) dividends and distributions; (3) distributive shares of a pass-through entity; (4) receipts from the sale, exchange or other disposition of capital assets or assets used in a trade or business; and (5) compensation received or to be received by an employee for services rendered to an employer.
  • ?Taxable gross receipts? are specifically allocated (?sitused?) to Ohio as follows: (1) gross receipts from the sale of real property sitused based on the location of the property; (2) gross receipts from the sale of tangible personal property would be sitused to Ohio based on the location where the purchaser receives the property; and (3) gross rents and royalties from tangible personal property based on the location or use of the property.
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4. Taxpayer Compliance

  • Taxpayers will generally be required to file calendar quarterly returns, with the fourth quarter return designated as an ?annual reconciliation.?
  • Calendar quarters would end on March 31st, June 30th, September 30th and December 31st, with the corresponding reports and remittances due by the 40th day after the end of the quarterly or annual tax period.
  • Taxpayers anticipating less than $1 million of annual gross receipts may elect and pay the tax annually.
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5. Registration Requirements

  • All taxpayers subject to the CAT must register by November 15, 2005.
  • The registration fee, to be credited against the taxpayer?s first tax payment, will be $15 for timely filed electronic registrations and $20 for timely filed paper registrations.
  • Electronic registration is available online through the Ohio Business Gateway at obg.ohio.gov or through Ohio?s web site at tax.ohio.gov. Paper registration forms can be downloaded at tax.ohio.gov or requested by calling (800) 282-1782.
  • All persons that are taxpayers having more than 50% common ownership, directly or constructively through related entities, are required to be a combined taxpayer unless a consolidated taxpayer election has been made.
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6. Credits

  • A few credits available against the CAT include (1) the job retention credit; (2) the job creation credit; (3) a qualified research and development credit; (4) a transitional credit; and (5) an excess CAT credit.
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  • The transitional credit is available to certain taxpayers that have at least $50 million of Ohio net operating loss carry-forwards.
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  • Taxpayers intending to claim the transitional credit must file a detailed report with the tax commissioner by June 30, 2006.
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B. CHANGES TO EXISTING OHIO TAXES

1. Franchise Tax

  • The Franchise Tax will be phased out for most general corporate taxpayers at a rate of 20% over the next five years.
  • The phase-out is for both the net income and net worth portion of the tax.
  • A taxpayer will compute the franchise tax liability and then apply the appropriate phase-out percentage.
  • The minimum tax of $50 will still apply in full through the tax year 2009.
  • Until the Franchise Tax is completely phased-out and the CAT is completely phased-in, a taxpayer will have two different returns to file with the State of Ohio.
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2. Tangible Personal Property Tax

  • Manufacturing machinery and equipment newly installed in Ohio after December 31, 2004 is exempt from the tangible personal property tax.
  • The tangible personal property tax on all other property is phased out ratably over the next four years.
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3. Personal Income Tax

  • Ohio personal income tax rates will decrease 4.2% per year beginning with taxable years 2005 through 2009.
  • The top marginal rates will decrease from the current 7.5% to 5.925% for taxable year 2009.
  • A person whose adjusted gross income, minus Ohio exemptions, is less than $10,000 will not be taxed starting with taxable year 2005.
  • The taxation of trusts is made permanent starting with taxable year 2005.
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4. Sales and Use Tax

  • The statewide sales and use tax rate is 5.5% starting July 1, 2005 and thereafter.
  • Counties and transit authorities are permitted to impose ?piggy-back? sales and use taxes up to 1% each.
  • The vendor discount for timely filing of sales and use tax returns and remittances will remain at .9% until July 1, 2007.
  • The definition of ?price? is changed to include the CAT, i.e., it is considered a cost of doing business, and may be included like other overhead costs in the part of the total price that is charged to customers.
  • Ohio will eventually conform to the Streamlined Sales and Use Tax Agreement that establishes the following hierarchy of new sourcing rules for taxable sales:
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    • The sale is sitused to the business location of the seller if the product is received by the purchaser at a business location of the seller;
    • The sale is sitused to the location where receipt by the purchaser occurs when the product is not received by the purchaser at a business location of the seller;
    • The sale is sitused to the location indicated by an address for the purchaser available from the seller?s business records maintained in the ordinary course of business if none of the above apply;
    • The sale is sitused to the location indicated by an address for the purchaser obtained during the consummation of the sale, including the address of the purchaser?s payment instrument, if none of the above apply;
    • If none of the above applies, then the location will be determined by the address from which the product was shipped.
  • The foregoing rules were to be effective July 1, 2005, but their enactment has been delayed as follows:
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  • Vendors who elected to apply the rules as of January 1, 2005 must continue to do so;
  • Rules change to the above as of May 1, 2006;
  • Vendors with sales in excess of $30 million in 2005 must comply by May 1, 2006.
  • Vendors with sales in excess of $5 million in 2006 must comply by May 1, 2007.
  • All vendors must comply with the new sourcing rules on January 1, 2008.

The American Jobs Creation Act of 2004

  • The recently passed American Jobs Creation Act of 2004 (the ?Act?) includes some new incentives that all taxpayers should be aware of.

         The opportunity to deduct state and local sales taxes in lieu of deducting state and      local income taxes (see below).

         Numerous business incentives, including increasing the number of eligible      shareholders for S Corps, acceleration of depreciation deductions for certain      leasehold improvements, favorable tax treatment of incentive stock options and      employee stock purchase plan options, and deductions for manufacturing /      production activities.

    Perhaps the opportunity that will impact the most individuals will be the option to effectively deduct the greater of sales taxes or income taxes paid at the state and local level. This will primarily benefit residents of ?no state income tax? states? like Florida. The timing of large non-business purchases (e.g., an automobile) now needs to be considered. Also, it is not too early to begin gathering your 2004 receipts to see if can take advantage of the new law.

    There are ?tightening provisions? as well, including those governing the charitable deductions for autos, boats and planes, those limiting the first year depreciation on SUV?s, those governing the reporting of non-cash charitable contributions, and those shutting down abusive tax shelters.

    We would be happy to help you understand and take advantage of these new opportunities and provisions. Call us today!

Selected Ohio Tax Law Changes

  • There have been numerous changes to the Ohio tax laws over the past few months as I am sure you have read about in the news. The purpose of this letter is review these changes as they affect you and your business.

    Sales and Use Tax (Click Here)
    Personal Property Tax (Click Here)
    Franchise Tax, Trust Tax and Depreciation (Click Here)
    Municipal Income Tax Changes (Click Here)

    The Ohio Department of Taxation has been busy issuing administrative guidance documents to help in the interpretation of these changes; but there remains many questions. We will keep you posted. Visit this website often to review these updates.

    We are glad to discuss these changes with you and help you analyze the impact they may have on you and your business. We can also help you with implementing your systems to comply with these new changes. We look forward to hearing from you; we can be reached via e-mail or give us a call at (216) 464-7481.
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New IRS Audit Compliance Initiative to Launch

  • The Internal Revenue Service has introduced a new taxpayer compliance measurement project, entitled the National Research Program (NRP). The NRP is a replacement for the long dormant Taxpayer Compliance Measurement Program (TCMP). The IRS expects that at least 15,000 fewer taxpayers would be audited under the NRP than under the TCMP formulas. Click here for more details.

Viatical, Life Settlements and Escrow News:

  • Various states continue to pass legislation and issue regulations regarding investments in viatical settlements. Ohio is among the most recent states to pass legislation classifying an individual investment in a viatical or life settlement as a security. Tip: be sure you know your broker well and ask them specifically about securities regulation. If you are not sure or have additional questions, you can e-mail us at info@mpccpa.com for more information.
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Business Briefs

Home Refinancing

  • Mortgage Rates Are Coming Down!!! (Refinance And Put More $$$ In Your Pocket)
    Mortgage rates continue to drop! Now may be the time to refinance your mortgage. Current 30-year fixed-rate mortgage rates are below 6%. Mortgage rates are now at or close to historical lows. The interest savings on a $150,000 30-year mortgage with an interest rate decrease of 1.5% would be almost $55,000 over the life of the loan! Now may be the time to take advantage of these favorable interest rates.

    Please call us to discuss how you can make these interest rate decreases work for you!
  • You may also want to consider rolling other debt with higher, non-deductible interest into your home refinancing. This can be a big saver particularly if you have a high rate auto loan, credit cards and installment loans. Note: you must be careful in collateralizing your house with debt for short-term purchases.
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Health Insurance Premiums

  • Health insurance premiums continue to increase each year, sometimes at extraordinary rates. If you are a business owner here is a tip you may want to consider: IRC Section 125 Plan. These plans allow employees to pay their share of health insurance premiums with pretax dollars. This will save them income taxes, FICA and Medicare taxes, and may increase their net paycheck. The business owner can save the cost of the company's FICA and Medicare match. This savings usually will pay for the administration of the plan with a little left over. Finally, since the employee is saving a significant portion in taxes, the employer may be able to adjust the percentage of employee contribution.
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Tax Tips

2003 Tax Planning Tips

  • The year-end tax-planning season is upon us. Now is the time to review your 2003 tax situation and make moves to maximize your tax savings this year and beyond. We will be sending our 2003-2004 Tax Planning Guide later this month. Look for it in your mailbox. We also invite you to click here to get an electronic version of the guide.

    We also encourage you to visit our newest feature, The Tax and Business Alert. See this elsewhere on this Bulletin Board page. In the meantime, for some of the tax planning opportunities that warrant your consideration, please click here.

    Please review these tax savings considerations; we are here to help guide you through this maze to structure your personal situation to maximize tax savings in 2003 and beyond. Just call Mike Duffy at 216-464-7481 or e-mail us to set up an appointment to discuss how you can maximize your personal tax savings.

Flexible Spending Account Rules Softened to Include Over-The- Counter Drugs

  • On September 3, 2003, the Treasury Department and the IRS announced over-the-counter drugs can be paid for with pre-tax dollars through health care flexible spending accounts. This guidance clarifying that reimbursements for nonprescription drugs by an employer health plan are excluded from income. Thus, reimbursements by health flexible spending arrangements (FSAs) and other employer health plans for the cost of over-the-counter drugs available without prescription are not subject to tax if properly substantiated by the employee.

    Revenue Ruling 2003-102 explains that the statutory exclusion for reimbursements of employee health expenses is broader than the itemized deduction for medical expenses (which does not apply to nonprescription drugs). Thus, the guidance clarifies that employer reimbursements of employee health expenses that are nonprescription drugs, including reimbursements through health FSAs and Health Reimbursement Arrangements (HRAs), are excluded from income like other employer reimbursements of employee health expenses. This will result in savings to consumers with access to employer plans who may purchase nonprescription drugs.

    However, for purposes of the itemized medical expenses deduction, the cost of such over-the-counter drugs continues to be non-deductible. In addition, the cost of dietary supplements that are merely beneficial to the employee's health are not excluded from income.

    If you have any questions or need any assistance in this matter, please give us a call at 216-464-7481 or e-mail us.
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Standard Mileage Rate Increases for 2004

  • The IRS has announced that the optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 37.5¢ for business travel after 2003. That's a 1.5-cent increase from the 36¢ allowance for 2003 business travel. Also, after 2003, businesses may use the mileage allowance if they use 4 or fewer autos for business simultaneously (currently, it's restricted to one business auto). ;

    If you would like to discuss this or any other tax planning and pitfalls concerns, please e-mail us or call Mike Duffy at 216-464-7481.


Two significant changes to "Section 529" plans should improve an already popular method to fund higher education.

  • Section 529 of the Internal Revenue Code allows you to set aside up to $55,000 ($110,000 for married couples) for higher education costs (per beneficiary) generally without gift tax consequences. The earnings within the fund accumulate tax-free, and are taxable to the beneficiary when distributed for higher education (generally at a lower tax rate). If not needed, the beneficiary may pass the funds to the next generation. Other significant benefits are that these plans shift future investment growth out of the donor's estate to the beneficiary thereby assisting estate plans and secondly, the donor may, with limited penalties, undo the gift, removing control of the funds from the beneficiary.

    Neither the contributor nor the beneficiary to such a program was previously permitted to direct the investment of any contributions to the program (or any earnings on the contributions). The IRS will now allow the contributor to change (direct) investments either annually or upon a change in beneficiary. You now have greater control over these investments.

    As stated above, distributions are currently included in the taxable income of the beneficiary. However, starting in 2002, distributions used to pay qualified higher education expenses (room, board, tuition, books and supplies) will be excluded from taxable income.

The IRS is again scrutinizing shareholder loans.

  • The IRS recently released a new shareholder loan audit guide to pinpoint problem areas and to explain how imputed interest should be calculated in a variety of situations. IRS agents use these guides when conducting audits of your returns.

    For example, in the case of S corporations, the agents are instructed to determine if the loan was in lieu of reasonable compensation, and if so, then to assess payroll tax liabilities. Alternatively, loans could be classified as distributions, which could also result in taxable income in certain circumstances.

    If your corporation has shareholder advances, or you are not sure, please call us or e-mail us at info@mpccpa.com so we can assist you.

Help Us Save You Money on Your Tax Preparation Fees

  • Our tax software has the ability to import tax data from both Quicken® and Quickbooks® data files. Those of you with numerous 'Schedule D' capital gain and loss transactions can save time charges if we do not have to manually input these transactions. If you use either Quicken® or Quickbooks® to track your investments, we can directly import this data into our tax software program. While a review of your data is still necessary, this could dramatically reduce the input time for your tax return thereby cutting the time necessary to prepare your tax returns. Please e-mail or call Mike Duffy if you have any questions.

GAAP Flashes

  • This area is under development and will contain useful and easy to read analysis of accounting and presentation treatment of various types of transactions that affect your business.

Articles

  • This area is under development and will archive articles, marketing materials and other information published by Mills, Potoczak & Company.

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