Ohio Corporate Taxes

Seven Steps for Delegating Work
 
Do you own a small business? You may feel that the success-or the failure-of the business rests entirely on your shoulders. So you try to be in all places at all times. However, in most cases, this will result in problems for the operation and decreased productivity by other workers.

Solution: Practice the fine art of delegation. (It is an art, not a science.) If you parcel out certain jobs among other staff members, you can devote more of your time to areas with greater profit potential. Furthermore, this will enable you to develop a workforce of thinkers, not just doers.

Of course, you will still have to fight your natural tendencies.

Click here for seven practical suggestions for getting or here if you'd like to learn more about how your staff can learn to better use QuickBooks.

Locking in a Partial Home-sale Exclusion

Despite the recent nationwide real estate slump, you may realize a significant gain if you sell your home, particularly if you bought the place before prices soared in prior years. What about the tax consequences? Generally, the amount of the proceeds is subject to tax at capital gain rates. Currently, the maximum tax rate on net long-term capital gain is 15%, but rates are scheduled to increase in future years.

Click here to read more.

Prescription for the New Health Care Credit
Federal Reserve Board Compensation Guidance
By: Theodore R. Ginsburg, JD, CPA

As we are all aware, one of the side effects of the nation's recovery from the financial crisis has been a dramatic increase in financial institution regulation from Congress, the executive branch   and from the Federal Reserve Board ("FRB").  One of the primary areas of the FRB's focus has been the compensation practices of member banks.  On June 21, 2010, the FRB (in conjunction with the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation) issued its "Final Guidance on Sound Incentive Compensation Policies" (the "Guidance"). 

In general, the FRB believes that incentive compensation programs caused bank employees to take actions that put their employers at risk.  While this is important information for banks, the overall guidance that the FRB provides is worth noting by all employers.

This brief article will summarize some of the key points of the 47 pages of guidance that the FRB issued.

Aurum Capital Markets Summary

Please click here for a summary from Aurum Wealth Management Group on the performance of the major market indices through the end of June as well as a recap of the significant events influencing the markets.

Click here for 2010 Second Quarter Commentary from Aurum.

Florida Tax Amnesty

The state of Florida is currently administering a tax amnesty program that runs through September 30, 2010. Eligible taxes are sales tax, fuel tax, corporate income tax, communications services tax, gross receipts tax, and Florida's intangible tax. The amnesty applies to tax liabilities due prior to July 1, 2010.

If a taxpayer owes any tax liabilities to Florida, this could be an excellent opportunity. Florida will waive ½ of the interest and all penalties on the tax due.

Click here to learn more.

Go Directly From a 401(k) to a Roth  

Do you want to transfer your 401(k) plan assets to a Roth IRA? Under a recent tax law change, you can make the move in one fell swoop. Previously, it took two separate steps. In addition, another tax law provision taking effect this year may encourage this direct approach.

Click here to read more or here to register for our free Roth IRA Conversion Seminar.

To read this issue of Special Delivery in its entirety, click here.

2010 Real Estate and Construction Survey

Skoda Minotti is conducting our 3rd annual survey of the Northeast Ohio real estate and construction industries. Every participant who completes the questionnaire will receive a free copy of the survey results and analysis and have a chance to win a $50 gift card to Dick's Sporting Goods.

The goal of the survey is to provide professionals in the real estate and construction industries in Northeast Ohio with the invaluable insight into their industries.

As an added bonus, one out of every 20 survey participants will be randomly selected to receive a $50 gift card to Dick's Sporting Goods. Note that only the first 100 survey participants will be eligible for the gift cards, so act quickly.

Click here to complete the real estate or the construction survey.

Please feel free to contact Bob Goricki at bgoricki@skodaminotti.com or 440-449-6800 with any questions related to the survey.

Green Building & Green Leasing: What is it, and why should I care?

By Peter D. Brosse, Esq., Meyers, Roman, Friedberg & Lewis

Since the establishment of Earth Day, the creation of the Environmental Protection Agency (EPA), and issues brought to public light by the Oil Embargo in the early 1970's, Americans have become more sensitive to the environment and use of resources, including petroleum. However, we still continue to use many of the same chemicals, gasoline and other resources as we did before, subject, however, to regulation.  Recently, a revolution has begun with new attention to conserving energy and resources. This new "green revolution" is evident with the use of a new vernacular that has entered into our common language. Only a few years ago, such words as "green","sustainable," "renewable energy," "greenwashing," "LEED" and "Energy Star" were rarely, if ever, used.  Today, these are part of everyday speech. Nowhere has this "green revolution" been more evident than in the real estate industry.  Such words as "building green" and "green leasing" are commonly heard and many articles are written about the subject. When discussing green building and green leasing, the question that owners, developers and tenants typically ask is "What is it, and why should I care?"

Is there a difference between "green" and "sustainable?"

Yes, there is a significant difference.  When one considers green building or green leasing, it is really sustainability and not "green" that is the focus. "Green" generally means to be environmentally friendly. To be "sustainable" means more. When one refers to sustainability, it takes into consideration the life cycle of a product or a building. To say a product is sustainable, one needs to look at processes, procedures, materials, how the product is manufactured, and whether the product can be reused or ultimately finds its way to the landfill.

Click here for more of this article.

Residential Real Estate: Making Modifications Work
By Brian Bader

Lew Ranieri, often credited with creating the mortgage-backed securities industry when he was at Salomon Brothers in the early 1980s, has returned to try to save America from the worst effects of that accomplishment. In 2008, Ranieri established the Selene Residential Mortgage Opportunity Fund, raising money primarily from foundations and pension funds, to buy and restructure failed mortgages created to feed the securitization process. In doing so, he is showing how mortgage modifications can work - and why the federal home-owners modification program (HAMP) has done so poorly by comparison.

Click here for more of this article.

CMBS: Special Servicers
By John Tax

Special servicers are the firms trying to correct mortgage loans in the later stages of delinquency or in actual default. Their role has become increasingly important as a result of the tremendous number of troubled loans According to a report by Standard & Poor's (S&P), servicers have been training their staffs to address the unique aspects of these loans, packaged as commercial mortgage-backed securities (CMBS). Almost 50 percent of these unresolved assets are loans originated in 2006 and 2007. Many of the loans are more complex than older ones, which mean it takes longer to resolve them, either by a full workout, a discounted payoff or foreclosure sale. Because of the time period in which they originated, many of the newer loans lack some of the safeguards present in the commercial loans originated before 2004.

Click here for more of this article.

Securitization: Covered Bonds
By Anthony La Malfa

The use of covered bonds as a source of home-mortgage funds is being encouraged by the U.S. Treasury Department and the Federal Deposit Insurance Corporation (FDIC) because they offer much greater certainty for the bondholders with respect to damages and rights.

Covered bonds contain a key element that is missing in many commercial mortgage backed securities (CMBS), i.e., a double layer of protection for investors, with the asset being backstopped by the issuer of the securities. The key difference between CMBS and covered bonds is that the latter requires lenders to retain the default risk. On the other hand, covered bonds fail to provide a good option for private labels because they require a capital base to retain loans on balance sheets and do not provide the higher level of leverage that was available with CMBS.

Click here for more of this article.

Leases: Subordination Clause Could Harm Tenants
By David Tevlin

Commercial lease agreements often are long and complex, with clauses neither party may expect will ever be triggered by events. But sometimes they are. One such is the lease subordination clause, by which the tenant agrees the lease is subordinate to any present or future mortgage that the landlord may put on the property. Accordingly, foreclosure of a mortgage (depending on the law of the state involved) either will automatically terminate the lease or entitle the lender, at its option, to terminate the lease.

Click here for more of this article.

Legal View: Second Circuit Rejects Champerty Defense
By Alvin Arnold

Champerty is not a word often heard these days, even though it is a living doctrine in modern law and on occasion has real bite. In a recent case, the Second Circuit Court of Appeals reversed a trial court ruling that had dismissed a mortgage trust's suit for indemnification for loan losses from the originator. Trust for Certificate Holders of Merrill Lynch Mortgage Investors v. Love Funding Corp., 391 F.3d 116 (C.A.2, N.Y.). However, the reasoning of the decision leaves some room for the distressed debt markets to be concerned.

Click here for more of this article.

Migration: Major Shifts
By Andrew Dalecki

Every type of real estate - housing, business, retail, and office - is impacted by population movements across the U.S. and across its borders. In its most recent report, based on new Census numbers, the Brookings Institution says the past ten years saw the greatest migration slowdown since the end of World War II. Significant events were the housing bubble and the worst recession in more than half a century, as well as major storms and terrorist attacks.

Click here for more of this article.

Cleveland Market Overview

Signs are pointed towards recovery for commercial real estate in Cleveland.  The vacancy rate was down over the previous quarter, with net absorption totaling positive 293,238 square feet in the first quarter.  In fact, with the exception of the Southwest and Downtown's Financial and Warehouse submarkets; all markets posted a positive overall net absorption for the first quarter of 2010.  The Cleveland office market ended 1st Quarter with a slight decrease in the overall vacancy rate, 21.8%, as sublease space outperformed direct deals.  Another good sign; rental rates are stabilizing, ending the first quarter at $17.90 per square foot. 

Nationally, as job losses abate and turn into employment gains across various industries and geographies, more markets are moving towards recovery.  This includes Cleveland because we lacked the high stock of inventory that plagued more developed markets (Las Vegas, Phoenix, Florida).  Cleveland should be in a good position to rebound quicker than other markets and continue to see an increase in activity and deal flow.

More information on the real estate markets in North America is available courtesy of Jones Lang LaSalle .  For questions on this information, please contact Andrew Coleman or J.R. Fairman at (216) 861-7171.

The Tax Court has held that, under the regs, a land surveying firm is treated as performing engineering services even though it employed no engineers. As a result, the Tax Court found that the firm was a qualified personal service corporation subject to a flat 35% tax rate.

Background. C corporations generally are subject to tax at graduated rates on their taxable income. (Code Sec. 11(b)(1)) The benefits of the graduated rates phase out after taxable income reaches a specified amount. By contrast, qualified personal service corporations are subject to a flat 35% tax rate. (Code Sec. 11(b)(2))

A corporation is a qualified personal service corporation if it meets the function and ownership tests: 

• Substantially all of its activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. “Substantially all” means that 95% or more of the time spent by the corporation's employees, serving in their capacity as employees, is devoted to performing such services. Brokerage services, including commission-based financial services, are exempted from consulting services.
• Substantially all (95% or more) of the stock (by value) is held directly or indirectly by: employees performing the services or retired employees who had performed such services; or the estates of such employees, or any other person who, during the two-year period starting with the date that such an employee died, acquired that individual's stock because of his death. (Code Sec. 448(d)(2); Reg. § 1.448-1T(e)(4))

Facts. Kraatz & Craig Surveying Inc. (Firm) is engaged in land surveying in Tennessee. Land surveying is Firm's only activity. It does not employ any licensed engineers, is not associated with any firm that employs licensed engineers, and does not provide any services that State law requires to be performed only by a licensed engineer.
IRS determined a deficiency of $9,762 in Firm's Federal income tax for its tax year ending Dec. 31, 2005. In the notice of deficiency, IRS determined that Firm is a qualified personal service corporation under Code Sec. 448 subject to a flat 35% tax rate under Code Sec. 11(b)(2).

Parties' arguments. Firm argued that it did not meet the function test because it was not engaged in any of the types of services specified in the statute. Firm did not dispute the ownership test.

IRS argued that Firm's land surveying constituted the performance of services in the field of engineering pursuant to Reg. § 1.448-1T(e)(4)(i), which specifically treats land surveying and mapping as engineering.

Firm argued that the reg was invalid. Alternatively, it argued that if the reg is valid, it means that surveying and mapping services, if performed by an engineer, would qualify as services in the qualifying field of engineering. Under this argument, the reg would not apply in Firm's situation since it has no engineers.

Firm said that the Court should look to State law to decide whether surveying is in the field of engineering. Firm also contended that land surveying in Tennessee can be performed only by a licensed land surveyor and that it is not licensed to perform any activity which State law requires to be performed by a licensed engineer.

Court sides with IRS. The Tax Court held that whether a service is performed in a qualifying field under Code Sec. 448(d)(2) is to be decided by examining all relevant indicia and is not controlled by State licensing laws. It found that Reg. § 1.448-1T(e)(4)(i) is supported by the legislative history, by the ordinary meaning of the term “civil engineering,” which encompasses surveying, and by other indicia that surveying is regarded as within the field of engineering. As a result, it concluded that the reg is valid. Accordingly, it held that Firm's land surveying is a service performed in the field of engineering under Code Sec. 448(d)(2) and Firm is subject to the flat 35% income tax rate under Code Sec. 11(b)(2).

The Moral of the Story.  Professional service firms that may provide personal services that subject the Corporation to the flat 35% income tax rate should consider all viable options for organizing the business.  Other options of business organization may allow the stakeholders to take advantage of graduated rates.

References: For the tax rate for qualified personal service corporations, see FTC 2d/FIN ¶  D-1006 et seq.; United States Tax Reporter ¶  114.02; TaxDesk ¶  600,901 et seq., TG ¶  650. Information Courtesy: Thomson Reuters

As you begin preparing your 2009 tax individual or corporate tax return, there are several items to keep in mind.

What Individuals need to watch out for when filing 2009 returns:

• Effects of the American Recovery and Reinvestment Act of 2009:
      - Making Work Pay Credit
      - Changes to the Alternative Minimum Tax
      - First Time Home Buyer Credit
      - American Opportunity Credit
      - Long-Time Resident Home Buyer Credit
      - Energy Efficiency Credits
      - For more information, read our overview of the American Recovery and Reinvestment Tax Act of 2009 – 
        Individual Tax Provisions.
• Definition of a dependent:
      - More detailed (and confusing) definition of  who qualifies as a dependent 
      - Detailed rules for non-custodial parents to take qualifying child as a dependent
• Changes for homeowners:
      - Mortgage Forgiveness Debt Relief Act of 2007 and the rules for reporting cancellation of debt
      - Deduction for real estate taxes paid for non-itemizers
• The amount of the phase-out for itemized deductions is reduced
• Installment agreements can now be applied for online

What Businesses need to be aware of for 2009 returns:

• Bonus depreciation of 50% is extended for property placed in service before 1/1/10
• Section 179 expense limit of $250,000 remains in effect for 2009
• Net Operating Loss (NOL) carrybacks can be carried back 3,4 or 5 years, with some limitations
• New IRS rules regarding Cancellation of Debt income for S Corps
• 15 year write-off allowed for certain leasehold, restaurant and retail improvements
• Penalty for late filing of Partnership or S Corporations raised to $195 per owner
• Possibly minimizing self-employment tax of LLC
• Proposed IRS regulations contain rules for expensing vs. capitalizing repairs and property acquisitions
• For more information, read our overview of the American Recovery and Reinvestment Tax Act of 2009 – Business Tax Provisions. 

The Ohio Commercial Activity Tax was fully phased-in as of March 31, 2009. For those taxpayers with Ohio gross receipts between $150,000 and $1 million, the tax is $150. For taxpayers with Ohio gross receipts over $1 million, the tax is $150 plus a .26% tax of any Ohio gross receipts over $1 million.

Several key changes include:

1.      The Ohio personal property tax has been completely phased out. For most businesses the final report was the 2009 personal property tax report.

2.      The Ohio franchise tax has been completely phased out. The filing of 2009 franchise tax report was the final report for both C-corporations and S-corporations. 

The Ohio Department of Taxation (“the Department”) has provided guidance on several changes to the due date of the minimum tax. Beginning 2010, the $150 annual minimum tax will be due no later than May 10^th of each year with the annual return for calendar year taxpayers or with the first quarter return for calendar quarter taxpayers, a change from the original February 9^th which will benefit most taxpayers.

The Department also provided some consistency for quarterly CAT filers. Quarterly CAT returns are now due the 10^th day of the second month following the end of the quarter or May 10^th [January 1 – March 31 quarter], August 10^th [April 1 – June 30 quarter], November 10^th [July 1 – September 30 quarter] and February 10^th [October 1 – December 31 quarter].

The Department also changed the date to cancel a CAT account. That date has been moved to May 10^th of the tax year. If a CAT account is cancelled by May 10^th, the taxpayer is not subject to the annual minimum tax. 

See the Department’s information release CAT 2009-01 - http://tax.ohio.gov/divisions/communications/information_releases/CAT/cat_2009_01.stm

Looking for assistance with State and Local Tax Issues? Contact us at 440-449-6800 or visit our State and Local Tax Services Web page.

Some of these opportunities may apply regardless of whether your business is conducted as a sole proprietorship, partnership, limited liability company, S corporation, or regular corporation. Other opportunities may apply only to a particular type of business organization. This Tax Letter is organized into sections discussing year-end, and year-round, tax-saving opportunities for:

1.      All businesses

2.      Partnerships, limited liability companies, and S corporations

3.      Regular (C) corporations

Tax planning for businesses also requires consideration of the tax consequences to the individual owners. Accordingly, we suggest you also review Tax Planning Considerations for Individuals Including Year-End Ideas.

Effective January 1, 2010, Ohio has made a few changes to the way sales of tangible personal property and taxable services are sourced. According to the Ohio Department of Taxation, the purpose of sourcing is to determine the location of the sale for sales tax purposes. If a sale is taxable, the sourcing of the sale will determine the appropriate jurisdiction’s tax rate for the seller to charge.

Below is guidance on the Ohio sales tax sourcing rules.

1. Ohio vendors who sell tangible personal property to Ohio consumers are required to collect sales tax based on where the order is received (origination) rather than the delivery location.  Those vendors who previously switched to destination sourcing are now required to switch back.   

Penalties will not be assessed so long as the vendors are compliant by April 1, 2010.

2. Sales of tangible personal property by out-of-state sellers to Ohio consumers will be sourced to where the consumer receives the tangible personal property. 

3. Sales of services (regardless of whether the provider is in Ohio or outside Ohio) should be sourced to the location where the consumer receives the service.

For a complete description from the Ohio Department of Taxation, please click here.

Looking for assistance with State and Local Tax Issues? Contact us at 440-449-6800 or visit our State and Local Tax Services Web page.

In 2008, Ohio set a new record with 85,782 new foreclosure filings, according to the annual study issued by Policy Matters Ohio, with Cuyahoga County leading the way. In an attempt to prevent this from devaluing our region, the Cuyahoga County Land Bank Reutilization Corporation (CCLRC) was formed. 

What exactly is the CCLRC? Here’s a crash course in the organization and its purpose:

“CCLRC, known informally as the Cuyahoga County Land Bank, was formed to help return vacant and abandoned properties in Cuyahoga County, Ohio, to productive use. From 2005 to 2009, the number of home foreclosures in Cuyahoga County increased dramatically. The result is tens of thousands of vacant or abandoned homes whose decay severely affects home values and the quality of life for everyone in the community. The CCLRC aims to help reclaim properties, protect the county tax base and restore real estate markets.”

For more information on the Land Bank, click here.

On Friday the 28th of August, the CCLRC held its board meeting open to the public. To kick-off the meeting, the organization’s President shared the short term plan which consists of ways that the available funds ($1.5 million: 750K for operations and 750K for capital acquisitions), will be used to set up the operations to guarantee that the land bank will be able to systematize its key processes in order to attain its long-term and strategic goals. In the short run (6 months), the CCLRC will be working closely with the county auditor’s department and the sheriff’s department to coordinate a smooth process to obtain properties.

The CCLRC’s long-term strategic plan is less specific, but it lies upon four key concepts.

• See that properties acquired will have a definitive use – not to acquire properties for acquisition’s sake.
• Reduce blight in communities.
• Create substantive value by eliminating the cycle of churning that has been a main force in creating blight.
• Support already existing plans, which entails working with municipalities and community development corporations (CDC’s) who already have definitive plans and know best the ways to help their communities. This is the corner stone of the entire framework

The main goal is to see that the dollars spent by the CCLRC are put to the greatest marginal utility through the use of goal oriented metrics. These metrics will define the desired impact, volume, and value of the resources being deployed. 

The organization’s board stressed several key points:
 

• Measurement metrics 
• Strategic land assembly
• Foreclosure prevention
• A “green” approach and focus

The CCLRC is a regional organization, which is poised to usher in regionalism to Northeast Ohio. To be effective, the organization needs a definitive vision to guide the use of its power. CCLRC’s principled approach will lead the march toward reutilizing land that has fallen to blight. If the CCLRC is able to work with non-profit CDC’s and private developers, the CCLRC will have a synergistic effect where the whole has potential to be greater than the sum of its parts.

That’s right. State officials now say that California’s financial situation is so serious that many taxpayers may receive IOUs instead of refunds for state taxes. Warnings of delayed tax refunds and warrants started as early as January, 2009. 

The State of California is planning on issuing warrants instead of refund checks. A warrant is issued by a government agency when they are unable to pay currently and are redeemable at some point in the future, usually with interest. Only once since the Great Depression has the State of California had to issue warrants. 

California is entering the 2009-10 fiscal year on July 1 with a deficit of nearly $24 billion. State tax revenues have fallen 27 percent in the past year. In February, the State passed a budget, but the legislation was dependent on the passage of several ballot propositions that were rejected by voters in May. 

Other than arranging for a smaller tax refund, which is too late for most, is there anything a taxpayer can do in this situation?

Individuals working in California can choose to have their refunds applied to next year’s taxes and then request lower wage withholdings. Business can also choose to apply to next year’s taxes and reduce subsequent year’s estimated tax payments.

Some reports cite the recession will last longest in the Midwest, including Ohio. Although officials in Ohio have not discussed issuing warrants, both individuals and businesses should minimize tax refunds in case this happens here in Ohio.

Click here to learn more about Skoda Minotti’s tax planning and preparation services or contact us at 440-449-6800.

Topics: Akron Tax Accountant, Cleveland Tax Accountant