Legislators begin hearings over CPAs’ priority issues

Written on Sep 22, 2017

OSCPA staff report

The House Ways & Means Committee on Sept. 19 heard sponsor testimony on three bills that touch upon the Society’s fall legislative priorities.

The bills address the need for a bright line residency statute (House Bill 292); ODT audits of PEOs on the SBD/BID (HB 334); and Ohio’s ill-advised marriage tax penalty (HB 333).

State of Residence Test

House Bill 292 was drafted with the assistance of OSCPA and introduced in June by Ohio Society member and State Rep. Gary Scherer, CPA, R-Circleville. It would re-establish a test for determining an individual's state of residence for Ohio income tax purposes. It is designed specifically to correct an issue in Cunningham v. Testa, a 2015 Ohio Supreme Court case that incorporated the common law of domicile into Ohio’s bright-line residency statute (R.C. 5747.24), once again turning the process into a fact-searching expedition. The Ohio Supreme Court stated that under common law, ODT could look at several “evidentiary factors” including “filing federal income tax returns, voting, automobile registration or location of spouse and children.”

In his testimony Sept. 19, Scherer said his bill would once again create explicit criteria to determine whether a person is a non-resident of Ohio for income tax purposes. In addition to the 212 contact periods and having an abode outside Ohio for the entire taxable year, ODT would be limited to only the following bright line criteria, including that the individual did not: 1) claim a federal depreciation deduction for a non-Ohio abode, 2) hold a valid Ohio driver’s license, 3) claim the Ohio homestead real estate exemption, or 4) receive a resident tuition discount at an Ohio institution of higher education.

“This bill, if passed, will provide much-needed clarity to factors that can be examined by ODT,” said Greg Saul, OSCPA’s director of tax policy. “Right now, snowbirds and other non-Ohio residents are open to literally dozens of common law factors that can cause their out-of-state residency (for state income tax purposes) to be questioned, making it challenging for these individuals to know how to comply.”

ODT Audits of PEOs on SBD/BID.

House Bill 334, introduced in August by Scherer with OSCPA’s input, would provide that wages and guaranteed payments paid by a Professional Employer Organization to the owner of a contracted pass-through entity may be considered business income for purposes of the Small Business Deduction and Business Income Deduction.

In his testimony, Scherer said the problem came to light late last year when small business owners using PEOs were audited and found by the Ohio Department of Taxation to be ineligible for a small business tax deduction unless they met certain criteria, such as that they own at least 20% of the PEO with whom they contract.

Scherer said the bill would address this issue by providing that compensation and guaranteed payments paid by a PEO to a small business owner that has contracted with the organization would legally constitute a distributive share to the owner, thereby meeting the 20% ownership requirement.

OSCPA has been busy over the summer working to resolve this retroactive change in tax treatment. Earlier this month ODT announced that, pending the outcome of HB 334 and companion legislation in the Senate – SB 186 – it “has suspended audit activities related to individuals who received compensation from a PEO that they do not own, and who claimed a small business/business income deduction.”

OSCPA is set to testify Wednesday on SB186 before the Senate Ways & Means Committee.

Marriage tax penalty

The Ohio Tax Reform Task Force, a committee of OSCPA members who took an in-depth look at the state’s tax policy, last year recommended getting rid of the state’s marriage tax penalty. HB 333, co-sponsored by Reps John Becker, R-Cincinnati, and David Leland, D-Columbus, would do that by allowing married couples to elect to file either separate state tax returns or a joint state return, irrespective of their federal filing status.

To calculate a married couple’s ideal filing status, practitioners must figure out the cost of filing jointly and separately for federal and state returns. According to the Tax Foundation, Ohio is one of the few Midwestern states to still use the state marriage tax penalty. Our neighbors Michigan, Indiana, Pennsylvania, Kentucky and West Virginia do not have to deal with the added tax complication.

As always, contact OSCPA Tax Policy Director Greg Saul, Esq., CAE, if you have questions on these bills or any tax issues.

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