Society testimony addresses residency test, PEO audit issue

Written on Oct 13, 2017

The Ohio Legislature on Oct. 10 heard from The Ohio Society of CPAs on two of its top fall legislative priorities: testimony was presented in favor of a bill that would re-establish a bright-line presumption of domicile test, and on another bill that would ensure money paid by professional employer organizations (PEOs) to pass-through entities is considered business income.

Greg Saul, JD, CAE, OSCPA’s director of tax policy, testified before the Ohio House Ways & Means Committee on House Bill 292, which would help to correct a confusing issue when it comes to deciding an individual’s state of residence for Ohio income tax purposes.

“House Bill 292 is designed specifically to correct an issue in Cunningham v. Testa, an Ohio Supreme Court case decided in July 2015 that incorporated the common law of domicile into Ohio’s bright-line residency statute (R.S. 5747.24), once again turning this process into a fact-searching expedition,” Saul said.

He told the committee that H.B. 292, which was introduced in June by OSCPA member State Rep. Gary Scherer, CPA, R-Circleville with assistance from the Society, would bring needed clarity back into this area of law. Scherer testified on Sept. 19 that this bill would create specific criteria to determine whether a person is presumed to be 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, the Ohio Department of Taxation would be limited to only the following bright line criteria: 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. H.B. 292 is scheduled for a possible vote in the House Ways & Means Committee on Oct. 24.

Also on Oct. 10, OSCPA Executive Board member Crystal Faulkner, CPA, CExP, MAFF, testified to the same committee on House Bill 334, which specifies that wages paid to pass-through owners can be business income for purposes of the SBD/BID. Faulkner spoke on the Ohio Department of Taxation’s audit position that “a PTE business owner who utilizes the services of a PEO is for some reason not considered a ‘business owner’ for purposes of the BID.”

“I am thrilled that H.B. 334 specifics that wages and ‘guaranteed payments’ paid to small business owners using the services of a PEO qualifies for the BID and 3% maximum tax rate,” she said. “Prior to the introduction of this legislation, ODT was auditing hundreds of small businesses utilizing PEO services and was retroactively going back and excluding the business owner’s compensation from the calculation.” Thankfully, ODT suspended the audits as of Sept. 7, pending the outcome.

Faulkner also recently wrote about this issue for www.cincinnati.com.

Most important, H.B. 334 applies to taxable years beginning on or after Jan. 1, 2013 (the first year the SBD/BID was effective). Companion legislation, S.B. 186, passed the full Senate by a vote of 30-2 on Oct. 18, and H.B. 334 is scheduled for a possible vote in the House Ways & Means Committee on Oct. 24.

For more information on these or any other issues OSCPA is working on, contact the governmental relations team.

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