Reminder: Ohio Quarterly CAT Return Filing Deadline is Thursday, August 10

The Ohio Quarterly CAT Return filing deadline is Thursday, August 10, 2017. 

The commercial activity tax (CAT) is an annual tax imposed on Ohio business entities and certain out of state businesses for the privilege of doing business in Ohio. It is measured by taxable gross receipts from business activities in Ohio.  Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, file all applicable returns and make all corresponding payments.  CAT applies to all types of businesses such as, but not limited to, retailers, service providers and manufacturers.  Certain receipts are not taxable receipts, such as interest, dividends, capital gains, wages reported on a W-2, or gifts.

Annual CAT taxpayers are those taxpayers with taxable gross receipts between $150,000 and $1,000,000.

Ohio CAT - Annual Filing Deadline

Taxpayers with annual taxable gross receipts in excess of $1,000,000 must file and pay returns on a quarterly basis.  Quarterly returns are required to be filed electronically through the Ohio Business Gateway.  Quarterly taxpayers are required to pay a $150 annual minimum tax for receipts up to $1,000,000 with their 1st quarter payment.  In addition, quarterly taxpayers pay a rate component for taxable gross receipts in excess of $1,000,000.

Ohio CAT - Quarterly Deadlines

Beginning in calendar year 2013, quarterly taxpayers shall apply the full $1,000,000 exclusion amount to the first quarter return for that calendar year and may carry forward and apply any unused exclusion amount to subsequent calendar quarters within the same calendar year.  Any unused exclusion amount from the calendar may not be carried forward into the next calendar year.

Taxpayers who are not registered for the CAT must register first before filing any return.

Commercial Activity Tax Deadline

Contact Levin Swedler Kennedy – Certified Public Accountants with any questions regarding Ohio CAT compliance.

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Managing Risk with Internal Controls

Fraud happens and it’s not just affecting large corporations.  Small to medium size business are also at risk due to internal control deficiencies and minimal enforcement of policies in place.  According to the 2016 Association of Certified Fraud Examiners (ACFE) Global Fraud Study, fraud is disproportionately affecting small businesses. Per the ACFE, 30% percent of all fraud cases occurred in businesses with less than 100 employees.  Billing schemes, skimming, and corruption are all top fraud risks for small businesses, according to the ACFE. A well-defined internal control system can help reduce your company’s exposure and give you a better chance of detecting fraud. The following are 4 of the most common challenges to consider when defining internal controls:

  1. Segregation of Duties – As the business grows, roles can become less-defined and opportunities for fraud exist. With increasing responsibilities for some employees, many business owners are unknowingly opening opportunities for fraud. Identify which employees are handling various aspects of your business and determine where these opportunities might exist. Your bookkeeper may process payables, receivables, cash disbursements, and cash receipts, but by segregating these duties you are taking away an opportunity to commit fraud.
  1. Documentation of Policies and Procedures – It’s important that job roles and business processes are clearly defined to ensure transparency and consistency for each business process. Without sufficient documentation of key transactions and business processes, no framework exists for developing and maintaining an effective set of internal controls. Documenting when various activities will occur and how certain processes will be evaluated gives necessary guidance to employees, while giving management a better sense of where fraud can occur. Management should place a continued emphasis on maintaining proper records to help reduce risks to your business.
  1. Employee Access to Information – In many small businesses, employees have access to most if not all data. This frequently occurs due to undefined employee roles and for convenience.  Work to limit your employees’ access to include only those items that they need.  Provide further access on an as-needed basis for temporary relief caused by terminations or absences.  This access should be reviewed periodically by management to determine whether rights should be added or revoked as an employee progresses within the company.
  1. Management Oversight and Review – The aforementioned internal control tips are useless without managerial emphasis on adherence to the policies and procedures your business has implemented. If shortcuts are routinely taken due to time or personnel constraints, these shortcuts can then become normalized.  Your company’s exposure to fraud will increase because of this.  Across most organizations, business owners and management can often be pulled in to the day to day operations to help meet the goals of the business.  It’s important to consistently review key business metrics, financial statements, and other data available to business owners and management.

These are just a few areas for managers and small business owners to review, but an increased emphasis on internal controls decreases your exposure to fraud. Your accountant is a useful resource for reviewing your internal control system, please contact Levin Swedler Kennedy for help.

Written by: Dane Schaffer

Levin Swedler Kennedy - CPAs

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Businesses Subject to the Partnership Tax Rules Need to Review Their Operating Agreements in Light of Changes Right Around the Corner

The Bipartisan Budget Act of 2015 is making major changes to the examination and collection processes the IRS uses in its administration of the tax regime that governs businesses that are taxed as partnerships, such as limited liability companies that don’t affirmatively elect to be taxed as a corporation (this is most LLC’s). The new rules go into effect for tax years beginning January 1, 2018, so 2017 will be the last tax year the IRS will conduct partnership audits by default under the old rules for calendar year entities. If you have an interest in an entity taxed as a partnership, you should be aware how these changes may impact you.

Examination Changes

IRS Building sign pictureThe old rules made use of a “tax matters partner” to be the representative the IRS corresponded with during an examination. Partners had a number of rights to participate throughout the audit on their own behalf, and some were entitled to certain notices throughout the process. The new rules are more restrictive. They designate that a partnership representative (who need not be partner) will be the sole representative the IRS corresponds with and the representative will have the authority to bind the partnership in all matters concerning the examination.

Collection Changes

The old rules mandated that the IRS deal with each of the individual partners in collecting audit adjustments, the partnership itself was not treated as a tax-paying entity. The default scheme under the new rules is to have the partnership pay any additional tax that results from an adjustment. Under this default scheme, the partnership will pay the tax at the highest individual rate, currently 39.6%. The partnership will not “go back” to the year the audit applies to and the individuals (or entities) that were partners at that time, the tax will be assessed as of the current year on the partnership entity. This means that new partners who have come into the partnership in years after the year the audit applies to may suffer financial losses for years that they weren’t even a part of the entity and hence didn’t benefit from a reduced tax bill.

Two Elections to Decrease the Impact of These Changes

There are two elections that can be made by partnerships that can eliminate or lessen 2nd picture for Brian's blogthe impact of these new rules. For short-hand, the elections are called by the section of the Tax Code they are contained in: the Section 6221 election and the Section 6226 election. Finally, absent making either of these elections, there are some provisions that can lessen the bite of the IRS using the highest individual rate when computing the additional tax attributable to the audit adjustment.

The Section 6221 Election

This election allows the partnership to completely opt-out of the new examination and collection rules. The partnership must have 100 or less partners and partners may only be individuals, S corporations, C corporations, or some estates. It is not entirely clear at this point whether single member LLC’s generally treated as disregarded entities will be treated as individuals for this purpose. However, it seems very likely that they will not as proposed regulations have been issued that would not allow such treatment (so any entity with an LLC owner would not be eligible for this election). This election must be made on the timely filed return for the year the audit applies to, it cannot be made after that point.

The Section 6226 Election

This election allows the partnership to opt-out of the new collection rules, the new examination rules will apply. The election is not restricted to smaller partnerships like the Section 6221 election. The election can be made up to 45 days after the final notice of adjustment is made by the IRS after an examination. Rather than collect the additional tax at the partnership level, this election allows the partnership to issue the IRS adjustment applicable to each partner to that partner. That partner then incorporates the adjustment into their current year individual income tax return. Making this election allows partners who were not partners during the audit year not to be penalized and reduces the tax due in terms of those partners not in the highest individual income tax bracket.

If Neither Election is Made

If neither election is made, partnerships may reduce the amount of entity-level tax by having partners (or former partners) file amended returns for the audited year consistent with the adjustment applicable to them. Partnerships may also reduce the entity-level tax by demonstrating to the IRS that there are partners that have certain tax characteristics, such as having a tax-exempt partner. There isn’t much guidance on how these provisions will be carried out at this point; partnerships should first consider their options under the two elections available.

Implications

Entities taxed as partnerships should review their operating agreements and update them accordingly before the implementation of these new rules. For instance, the partnership representative in the event of an examination should be agreed upon and language concerning the use of the Section 6221 and possibly the Section 6226 election should be incorporated into the agreement. Additionally, some entities may want to add language concerning potential tax reserves, partner indemnifications, requirements for former partners to file amended returns in certain circumstances, and/or holdback/claw-back provisions. Make sure that you consult with your tax advisor before implementation of these news rules to better understand their potential impact on you and to have your operating agreement amended where needed.

Written by: Brian Spencer

Akron, Ohio Certified Public Accountants

 

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ONCE AGAIN OHIO WILL HAVE A SALES TAX HOLIDAY IN AUGUST 2017

Good News for Ohio Consumers – Once again S.B. 9 has enacted a one-time sales tax holiday to occur in 2017.  The holiday starts on Friday, August 4, 2017 at 12:00 a.m. and ends on Sunday, August 6, 2017 at 11:59 p.m. During the holiday, the following items are exempt from sales and use tax:

  • An item of clothing priced at $75 or less;backtoschoolsalestaxholiday2
  • An item of school supplies priced at $20 or less; and
  • An item of school instructional material priced at $20 or less.

There is no limit on the amount of the total purchase. The qualification is determined item by item. Items used in a trade or business are not exempt under the sales tax holiday.

Impact on Ohio Businesses – FAQ’s

Q: Can a vendor choose not to participate in the sales tax holiday?

A: No. The sales tax holiday is set by law and vendors must comply.

Q: Does the $75 exemption apply to the first $75 of an item of clothing?

A: In other words, if the selling price of an item of clothing is $80, is the first $75 exempt from sales tax?  No. The exemption applies to items selling for $75 or less. If an item of clothing sells for more than $75, tax is due on the entire selling price.

Q: What types of items qualify as school supplies?

A: School Supplies include only the following items: finders; book bags; calculators, cellophane tape, blackboard chalk, compasses, compositions books, crayons, erasers, folders, glue, paste,  highlighters, index cards and boxes, legal pads, lunch boxes, markers, notebooks, paper, colored paper, poster board and construction paper, pencils, pens, pencil boxes and school supply boxes, pencil sharpeners, protractors, rulers, scissors, and writing tablets.

Q: What types of items qualify as school instructional material?

A: “School instructional material” includes only the following items: reference books, reference maps and globes, textbooks, and workbooks.  Items not included in the list are taxable. “School instructional material” does not include any material purchased for use in a trade or business.

Q: What about buy one; get one free or items sold for a reduced price?

A: The total price of items advertised as “buy one, get one free” or buy one for a reduced price” cannot be averaged to qualify both items for exemption.  The exemption depends on the actual price paid for each item.  For example, if a consumer buys one clothing item at $80.00 and receives another item for free, the purchase would be subject to sales tax.

Q: Does the exemption apply to mail, telephone, E-mail, and internet orders?

A: Qualified items sold to consumers by mail, telephone, e-mail, or Internet shall qualify for the sales tax exemption if the consumer orders and pays for the item and the retailer accepts the order during the exemption period for immediate shipment, even if delivery is made after the exemption period.

Q: How do retailers report exempt sales?

A: If you sold clothing, school supplies, or computers qualifying as exempt items during the sales tax holiday, these exempt items must be reported on Ohio’s Sales and Use Tax Return. All sales for the period, including exempt sales, should be reported on Line 1, under Gross Sales of your sales tax return (form UST-1). Qualifying sales exempt during the holiday should be entered on Line 2 of your UST-1 and subtracted from gross sales along with any other exempt sales for the period.

Visit the Ohio Department of Taxation’s website for a complete listing of both consumer and business related sales tax holiday FAQ’s including the definitions of qualifying clothing, school supplies and school instructional materials.

Akron Ohio CPAs

 

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Why Small Business Owners Should Consider Outsourcing Their Accounting and Tax Functions

Have you ever wondered why some of the most successful entrepreneurs and business leaders wear the same outfit each day? It is said that Albert Einstein bought multiple versions of the same gray suit to limit the number of decisions made each morning to preserve brainpower. Steve Jobs wore the same type of blue jeans and black turtleneck to prevent decision fatigue. Most recently, Mark Zuckerberg has been known to wear the same gray t-shirt each day. His reasoning, “I really want to clear my life to make it so that I have to make as few decisions as possible about anything except how to best serve this community”. When he says “serve this community” he means serving more than 1 billion Facebook users.

So you are probably reading this blog wondering, what does wearing the same clothes have to do with outsourcing your business’s accounting and tax functions?  To keep the analogy consistent with the clothing examples, it has to do with the many hats entrepreneurs and business owners have to wear each day. Being an entrepreneur often requires one to seamlessly shift back and forth between strategic planning, sales and marketing, human resource management, accounting, information technology, among other business functions. In everyday life there are only 24 hours in a day to contribute to running a successful business, growing your personal relationships, and arguably most importantly to live a healthy lifestyle.

Companies who take advantage of outsourced accounting and tax services save time and money, get access to timely and accurate accounting/bookkeeping services, and benefit from remaining compliant in all of their financial and tax reporting requirements.  Does outsourcing accounting make sense for you and your business?

Positive Outcomes from Outsourcing

  • Hiring an expert – First and foremost, outsourcing accounting and tax services to a CPA firm can help you rest at night knowing that you have hired experts to help you remain compliant with your ongoing financial and tax reporting obligations. CPAs are effective at assisting business owners in understanding how to use their books to understand and improve the overall health of your business.
  • Financial and Time Savings – In many cases, outsourcing services whether it is accounting or tax services, IT services, recruiting services or any other services may result in cost & time savings. Cost savings are derived from avoiding the costs related to employee payroll taxes, workers compensation insurance, unemployment taxes, health insurance, paid-time-off, and any other benefits your company may offer. In addition, business can also save on office space, furniture, computer equipment and software. The cost savings resulting from outsourcing can be significant. Time savings are accomplished by not having to hire, train, or manage employees. This can alleviate some of the hats mentioned above.
  • Continued Growth – Most of the time entrepreneurs get started because they have a skill, product, or passion that they believe if combined with their relentless drive to succeed will result in financial gains and a life worth living. Outsourcing accounting and tax functions can save you from getting lost in the monotonous details of bookkeeping and taxes and can help you maximize the time spent following your passion and leading your business forward.

Outsourcing Concerns

Despite some of the benefits listed above, many small business owners choose not to outsource their accounting and tax functions. Distance, response time, less control, and security risks are some of the potential concerns related to outsourcing.  While various cloud based technologies such as QuickBooks Online, Skype video conferencing, and secure document transfer portals such as ShareFile have greatly reduced the challenges associated with not having a team member physically in-house, there will always be various limitations associated with outsourcing services, but the accounting industry is continuously evolving to minimize and possibly eliminate these limitations.

If you are interested in learning more about outsourced accounting and tax services, please keep an eye out for our next blog which will describe some of the types of outsource services we provide for our clients.

Written by: Matthew Migal, Certified Public Accountant and QuickBooks Online Certified ProAdvisor

Levin Swedler Kennedy – Certified Public Accountants – Akron, Ohio

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Establishing Residency for State Tax Purposes

Have you been contemplating moving to another state with lower taxes? Your move could lower your state tax bill, but you want to make sure to establish that the new state is your place of legal residency (also known as your “domicile”) for state tax purposes. Otherwise, the old state could come after you for taxes after you’ve moved. In the worst-case scenario, your new state could expect to get paid, too. Here’s what you need to do to establish residency in the new state — and why moving your pet could be a deciding factor.

Recognize the Significance of Establishing Domicile

If you make a permanent move to a new state, it’s important to establish legal domicile there if you want to escape taxes in the state you left. The exact definition of legal domicile varies from state to state. In general, however, your domicile is your fixed and permanent home location and the place where you plan to return, even after periods of residing elsewhere.

Because each state has its own rules regarding domicile, you could wind up in the worst-case scenario of having two states claiming you owe state income taxes. That could happen when you establish domicile in the new state but don’t successfully terminate domicile in the old state.

Moreover, if you die without clearly establishing domicile in just one state, both the old and new states may claim that your estate owes income taxes and any state death taxes. So, it’s critical to know the rules that apply in your new and old states — and follow them.

How to Establish Domicile in a New State

Here are some actions that can help you establish domicile in a new state:

  • Keep a log that shows how many days you spend in the old and new locations. (You should try to spend more time in the new state, if possible.)
  • Change your mailing address.
  • Get a driver’s license in the new state and register your car there.
  • Register to vote in the new state. (You can probably do this in conjunction with getting a driver’s license.)
  • Open and use bank accounts in the new state. Close accounts in the old state.
  • File a resident income tax return in the new state, if it’s required. File a nonresident return or no return (whichever is appropriate) in the old state.
  • Buy or lease a residence in the new state, and sell your residence in the old state or rent it out at market rates to an unrelated party.
  • Change the address on important documents, such as passports, insurance policies, and wills or living trusts.

The more time that elapses after you move to a new state and the more steps you take to establish domicile in that state, the harder it will be for your old state to claim that you’re still a resident for tax purposes.

Don’t Forget the Dog

In the facts underlying a recent decision by the New York Division of Tax Appeals, the taxpayer lived in New York City until he took a job as chief executive officer at Match.com, which was based in Dallas, Texas. Ultimately, the court determined that he was legally domiciled in Texas, because that’s where he kept one of his nearest and dearest possessions — his dog. (In re Gregory Blatt, N.Y. Division of Tax Appeals, No. 826504, Feb. 2, 2017)

The taxpayer’s initial agreement with Match.com called for him to work in New York City. But in 2009, he decided to lease an apartment in Dallas and work from the Dallas office. His employment contract was amended to show that his principal place of employment was Dallas. He kept ownership of an apartment in New York City, although it was listed for sale after he agreed to work out of Dallas. He also kept a boat in New York, which he used while vacationing in the Hamptons.

By the spring of 2011, the taxpayer had terminated his employment with Match.com and moved back to New York City. Later in 2011, he sold his apartment in New York City and moved to the Hamptons.

For 2009 and 2010, the taxpayer claimed to be domiciled in Texas and, therefore, filed New York nonresident/part-year resident income tax returns for those two years. After being audited by the New York Division of Taxation, he was charged for state and city income taxes, interest and penalties totaling $430,065 on the grounds that New York City was his legal domicile for the entire time he was employed by Match.com.

Fortunately, the taxpayer was able to convince the New York Division of Tax Appeals that his domicile for 2009 and 2010 was, indeed, Dallas. The following factors helped persuade the court to accept Dallas as the taxpayer’s domicile:

  • He started going to the gym in Dallas, which he had never done in New York,
  • He had his prescriptions filled in Dallas, and
  • He obtained a Texas driver’s license and was registered to vote there.

As it turned out, the tipping point came when the taxpayer moved his dog to Dallas in November 2009. The significance of this action was documented in an email the taxpayer sent to a friend in which the taxpayer stated that moving the dog was the final step that he hadn’t previously been able to come to grips with. By taking the dog to Dallas, the taxpayer demonstrated that Dallas was officially his new home. The New York Division of Tax Appeals agreed, noting that moving items that are “near and dear” tends to demonstrate a person’s intention to change domicile.

Consult a Tax Pro

Planning to move to a new state with lower taxes? Unless you establish domicile in the new state and terminate residency in the old one, you could come under scrutiny by state tax authorities. Your tax advisor can explain the rules in your old and new states and how to avoid potential pitfalls.

Levin Swedler Kennedy – Certified Public Accountants – Akron, Ohio

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Reminder: Ohio Quarterly CAT Return Filing Deadline is Wednesday, May 10

The Ohio Quarterly CAT Return filing deadline is Wednesday, May 10, 2017. 

The commercial activity tax (CAT) is an annual tax imposed on Ohio business entities and certain out of state businesses for the privilege of doing business in Ohio. It is measured by taxable gross receipts from business activities in Ohio.  Businesses with Ohio taxable gross receipts of $150,000 or more per calendar year must register for the CAT, file all applicable returns and make all corresponding payments.  CAT applies to all types of businesses such as, but not limited to, retailers, service providers and manufacturers.  Certain receipts are not taxable receipts, such as interest, dividends, capital gains, wages reported on a W-2, or gifts.

Annual CAT taxpayers are those taxpayers with taxable gross receipts between $150,000 and $1,000,000.

Ohio CAT - Annual Filing Deadline

Taxpayers with annual taxable gross receipts in excess of $1,000,000 must file and pay returns on a quarterly basis.  Quarterly returns are required to be filed electronically through the Ohio Business Gateway.  Quarterly taxpayers are required to pay a $150 annual minimum tax for receipts up to $1,000,000 with their 1st quarter payment.  In addition, quarterly taxpayers pay a rate component for taxable gross receipts in excess of $1,000,000.

Ohio CAT - Quarterly Deadlines

Beginning in calendar year 2013, quarterly taxpayers shall apply the full $1,000,000 exclusion amount to the first quarter return for that calendar year and may carry forward and apply any unused exclusion amount to subsequent calendar quarters within the same calendar year.  Any unused exclusion amount from the calendar may not be carried forward into the next calendar year.

Taxpayers who are not registered for the CAT must register first before filing any return.

Commercial Activity Tax Deadline

Contact Levin Swedler Kennedy – Certified Public Accountants with any questions regarding Ohio CAT compliance.

 

Levin Swedler Crum - CPAs

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