Mid-June of this year, Senate Bill 246 was signed into law creating an elective pass-through entity (PTE) tax in the State of Ohio. The PTE tax is effective beginning with tax year 2022 and serves as a means for individual taxpayers to circumvent the Federal state and local tax (SALT) deduction limitation of $10,000 when itemizing on their personal tax returns.

Eligible entities (partnerships, LLCs, or S Corporations) that make the PTE tax election pay tax on behalf of its owners’ distributive share of the PTE’s net taxable income apportioned to Ohio. This tax payment at the entity level is in lieu of having the income passed through to the owner’s personal tax return, and paying the tax individually. The PTE election would also eliminate and replace the filing of a withholding tax return or composite tax return with the State by the company. Any overpayment of the tax paid by the PTE is fully refundable on the individual’s Ohio personal tax return, however the owner must file an Ohio tax return to receive any eligible refund.

The new PTE tax election serves as a roundabout to the Federal SALT deduction limitation because the PTE tax payment made by the company will fall to its bottom line, thereby reducing the total amount of taxable income the owner would recognize on their personal tax return. Since the SALT deduction is limited to $10,000, and anything in excess of that amount is lost (does not carry forward or backward), making the PTE election benefits the taxpayer by providing a direct reduction in the owner’s tax liability by reducing taxable income, and negates the lost benefit of SALT paid in excess of $10,000.

For tax year 2022, the PTE tax rate is 5%. For tax year 2023 and forward, the rate is decreased to 3%, which is in line with the Ohio Business Income tax rate assessed to individuals on their Ohio Form IT-1040 on taxable business income in excess of the $250,000 Ohio Business Income Deduction. The PTE election must be made by eligible pass-through entities no later than the 15^th day of the fourth month following the PTE’s tax year end. The election must be made annually, and is irrevocable.

Making the PTE election in Ohio will be beneficial to many taxpayers, but not all. It is important to consult with your tax advisor to determine whether or not making the PTE election is the most advantageous strategy for you.

Neitzel, Luke & Salopek, Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

When a natural disaster occurs, the IRS provides guidance on claiming casualty gains and losses on your damaged property.

If the amount of reimbursement received from a disaster, such as insurance proceeds, exceeds your adjusted basis in the destroyed property, you are required to report a casualty gain on your tax return. Alternatively, if you do not receive adequate reimbursement for your damaged property, you may be eligible to claim a casualty loss on your tax return.

Casualty gains are reported in the tax year in which reimbursement is received, which may or may not be the year in which the disaster occurred.

The IRS allows for two options by which a taxpayer may claim a casualty loss in the event of a federally declared natural disaster. An individual that incurs a casualty loss as a result of a federally declared disaster area may claim the casualty loss on their tax return for the year in which the loss occurs, or on the previous year’s tax return. As it relates to Hurricane Ian, taxpayers have the option to claim a casualty losses when filing their 2022 tax return during 2023, or by amending their 2021 tax return to claim it against last year’s income. The deadline to amend your 2021 tax return to claim a casualty loss incurred during 2022 is October 16, 2023.

Example 1 – Casualty Loss: Jeremiah owns a vacation home and accompanying land on Florida’s Gulf Coast, which was damaged by Hurricane Ian. Jeremiah acquired the property during 2018 for $400,000. Jeremiah’s adjusted basis and fair market value in the property immediately prior to the Hurricane were $400,000 and $750,000, respectively. Immediately after the Hurricane’s damage, the fair market value (FMV) of the property decreased to $150,000. In order for Jeremiah to repair the property back to its original adjusted basis of $400,000, he spent $200,000. Jeremiah was ineligible for flood insurance, and therefore received no insurance proceeds related to the disaster. Jeremiah’s casualty loss is calculated as follows:

Step 1:

The casualty loss calculation then continues by taking the lesser of the adjusted basis in the property or the loss on property from disaster.

Step 2:                                                              

The final step in the calculation then limits the deductible amount of the casualty loss based on the taxpayer’s adjusted gross income (AGI). For this example, assume Jeremiah’s  AGI is $180,000.

Step 3:                                                

The total casualty loss deduction for Jeremiah is $282,900.

Example 2 – Gain: Using the same fact pattern as Example 1 above, assume that Jeremiah received $450,000 of insurance proceeds. The calculation is as follows:

Jeremiah reports a long-term capital gain, because the property was owned longer than one year, on his tax return for the year in which the disaster occurred.

If you have questions or would like further information as to how natural disasters can impact your taxes, please consult your tax advisor. Neitzel Luke & Salopek Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

Did you work remotely during 2021? You may be eligible for a refund of city tax withheld on your wages.

The approval of the 2021-2022 fiscal year budget for the State of Ohio included a modification to H.B. 197. For the 2021 tax year only, remote workers living in a different city than that in which they worked prior to the pandemic can request a refund of taxes withheld for their work city. The amount eligible to be refunded is based upon the actual number of days worked “in the office.” Requesting a refund of city tax withholding may not be beneficial to all taxpayers, so it is important to understand how the Bill modification works.

Example A:

Jacob works for ABC Company. Prior to the pandemic, Jacob worked at the Company’s headquarters in Cleveland. Throughout 2021, Jacob worked from his home in Avon, and did not work any days in Cleveland. Throughout 2021, ABC Company continued to withhold Cleveland city tax on Jacob’s wages, despite his working each day in Avon. Jacob’s total wages for calendar year 2021 were $100,000. Cleveland’s income tax rate is 2.5%, so a total of $2,500 ($100,000 wages x 2.5%) of Cleveland tax was withheld from these wages.

Avon’s income tax rate is 1.75%. This means that Jacob would be required to pay $1,750 ($100,000 wages x 1.75%) on his wages to his resident municipality. Avon allows for a 100% credit of taxes paid to other cities, up to a maximum of 1.5% of wages, to be applied against his wage income. This means that up to 1.5% of city tax withheld and paid to another city on an Avon resident’s wages is eligible to be applied against his resident tax.

    $100,000              Jacob’s 2021 Wages

    1.50%                    Avon Credit Rate (Limit)

    $1,500                   Maximum Credit Allowed by Avon for Taxes Paid to other Cities in 2021

In tax years prior to 2020, Jacob would file a tax return for his resident city of and he would owe $250 to Avon (the difference between the $1,750 Avon city tax, and the maximum credit allowed for taxes paid to other cities of $1,500). For tax year 2021 only, Jason is eligible to request a refund of the full $2,500 city tax withheld for Cleveland since he did not work in the city at all during year, and would have to remit $1,750 of city tax to Avon.

Example B:

Using the same information as Example A, but switching Jacob’s work city to Avon and resident city to Cleveland, the results are not necessarily as beneficial.

Jacob’s employer withholds Avon taxes at $1,750 ($100,000 wages x 1.75%). Jacob lives in Cleveland, so he would owe $2,500 to his resident city ($100,000 wages x 2.5%). Fortunately, Cleveland allows for a 100% credit for taxes paid to other cities up to 2.5% (but not exceeding the amount actually withheld). In this instance, if Jacob does not request a refund from Avon of the tax withheld, this amount would reduce his resident tax owed to Cleveland by the full $1,750 withheld for Avon. Jacob would then owe $750 ($2,500-$1,750) to Cleveland when filing his tax return.

If Jacob were to request a refund of the $1,750 withheld to Avon, he would then be liable for the full amount to Cleveland of $2,500. Rather than requesting the refund and paying a higher amount to Cleveland and leaving the tax withheld with Avon, the need to file a refund request is eliminated and simplifies the preparation of his Cleveland tax return.

Rules established by individual cities or central tax agencies, such as the Regional Income Tax Agency (R.I.T.A.) or the Central Collection Agency (C.C.A.) may have different requirements by which remote workers may request a refund of tax withholding from their normal work city.

For example, R.I.T.A., requires that Form 10-A Request for Refund Claim (2021 version not yet released) must be completed with box #2 checked. Box #2 indicates that the taxpayer is eligible for a refund claim for days worked in a different location than their work city due to COVID-19. The employer must sign Part 2 of the Employer Certification included with Form 10-A attesting to information completed in Part I of the same section, as well as the Log of Days Out on page 3 of Form 10-A. Form W-2 is also required to be attached.

Some cities are only requiring a statement from the employer confirming the total number of days worked in the city for which tax was withheld (“in the office”) on wages to request the refund. This statement should be printed on the employer’s letterhead and be signed by an authorized representative. It is also recommended that a calculation be included with this statement supporting the amount of workplace city withholding that is requested to be refunded.

The modifications to H.B. 197 apply to tax year 2021 only. There is litigation currently pending in Franklin County regarding the application of the same Bill modification to tax year 2020. Once this lawsuit is settled, employees may be able to apply the same methodology of city tax withholding refunds to tax year 2020. 

The eligibility to request a refund for city tax withheld on wages lies solely with the employee; employers are not eligible for a refund of tax they withheld on employee wages.

While the ability for a remote worker to request a refund of city taxes withheld for a location in which they did not work every day during 2021 will be advantageous for many taxpayers, it may not be beneficial to everyone. It is important to discuss the modifications to H.B. 197 with your accountant to determine the best course of action for your particular situation.

Neitzel, Luke & Salopek, Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

Advance Child Tax Credit – Letter 6419, 2021 advance CTC

In late December 2021 and throughout January 2022, the IRS sent letters to taxpayers confirming the total amount of advanced child tax credit (ACTC) payments they received during 2021. The letter also indicates the number of qualifying children used in the calculation. This letter is important to retain as it will assist us while preparing your 2021 tax return in reconciling payments received against the total amount of which you are eligible to claim as a tax credit.

When preparing your 2021 tax return, we will use this letter to calculate the total amount of child tax credit for which you are eligible to receive versus the amount the IRS provided as an advance payment. If you are due an additional amount from what you have already received, you will be eligible to claim it on your 2021 tax return as applied against your tax liability, and refunded if you have sufficiently paid your tax liability via estimated payments or through payroll withholding. Alternatively, if you received more money from the ACTC than for which you are eligible, the total tax liability on your 2021 tax return will be increased by that amount, as you will be required to pay back the excess monies.

When sending us your 2021 tax documents, please include the letter you received from the IRS (if applicable). If you are unable to locate your IRS letter confirming the total advance child tax credit received, you can still access the information by visiting the Child Tax Credit Update Portal.

Economic Impact Payment #3 (stimulus payment) – Letter 6475 your Third Economic Impact Payment

At the end of January 2022 the IRS will begin to send a letter to taxpayers that received the third Economic Impact Payment (EIP3). EIP3 were issued between March and December 2021 to taxpayers based upon their filed 2019 tax return. Some taxpayers also received a “plus-up” payment during 2021 if the IRS determined, based upon their filed 2020 tax return, they were eligible for an additional amount.

The misreporting of your EIP3 will cause a delay in the processing of your 2021 tax return, as well as a delay in receiving any refunds to which you are due. Due to this, it is imperative to retain the letter and provide it to us when submitting your 2021 tax documents.

If you have questions, Neitzel Luke & Salopek Inc. is here to help. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

Coinbase, a commonly-used platform on which virtual currency, or “cryptocurrency,” transactions take place has simplified the way in which taxpayers can provide information to their accountants for the 2021 tax year.

To provide your tax accountant with the information needed to prepare your tax return, please follow one of the two methods below:

From a Web Browser:

1) Log into your account

2) Click on the grey and white circular icon on the top right of the screen

3) From the drop-down menu, click Taxes

4) Once logged in to Coinbase Account, you will see a summary of your Realized Gain or Loss, and a summary of Miscellaneous Income. This screen should be printed and provided to your accountant.

5) Next, click on Documents. If you have any tax forms required to be issued by Coinbase per the IRS, they will be listed here. Please save these documents and provide them to your accountant. Note: Documents required to be filed by Coinbase per the IRS will not be available until February 1, 2022.

6) Next, click on Activity. Scroll to the bottom of the screen and click Load More until all of your 2021 transactions are listed. Print this page and provide this to your accountant.

From the Coinbase app:

1) Log into your account

2) Click on the three lines to the top left

3) Click Profile & Settings

4) Under Account, click Taxes

5) From here, you will see a summary of your Realized Gain or Loss, and a summary of Miscellaneous Income. This screen should be printed and provided to your accountant.

6) Next, click on Documents. If you have any tax forms required to be issued by Coinbase per the IRS, they will be listed here. Please save these documents and provide them to your accountant. Note: Documents required to be filed by Coinbase per the IRS will not be available until February 1, 2022.

7) Next, click on Activity. Scroll to the bottom of the screen and click Load More until all of your 2021 transactions are listed. Print this page and provide this to your accountant.

If you have questions or would like further information as to how cryptocurrency transactions can impact your taxes, Neitzel Luke & Salopek Inc. is here to help. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

On March 13, 2020, a nationwide emergency was declared as a result of the SARS-CoV-2 virus. This declaration triggered the ability for employers to make certain qualified disaster relief payments to employees that, pursuant to IRC §139, are deductible by the company as a regular business expense and excludible from taxable gross income by recipient employee.

In order for a payment to remain eligible for this advantageous treatment, the following criteria must be met:

• The expense must have arisen as a result of the COVID-19 pandemic; and
• The expense for which the payment is remitted must be “reasonable” and “necessary” in nature; and
• The expense must be either personal in nature, related to a living expense, family oriented, or funeral-related; and
• The employee cannot have received a reimbursement or payment from any other organization or person for the same expense, including insurance payments.

The IRS defines an expense as “reasonable” when it is “necessary” in the ordinary course of business. The IRS defines an expense as “necessary” when it is “…helpful and appropriate for [the] trade or business.”

The IRS has set a precedence that medical expenses qualify under §139 treatment. Note that payments for lost wages or unemployment are explicitly excluded. Expenses qualifying under §139 treatment have no maximum, and do not get phased out after a certain amount.

An employer is not required to collect receipts or acquire other substantiation of expenses incurred by employees before providing payment pursuant to §139. Although not required, it is still recommended that documentation be obtained for record keeping purposes, and to help curb fraudulent reimbursement claims from employees. In addition, employers should consider establishing a disaster policy that includes guidelines under which the employer may or could reimburse employees for certain expenses incurred as a result of the qualifying disaster.

If you believe that your business or you as a sole proprietor would like to look further into taking advantage of §139 qualified disaster relief payments, consult your tax advisor. Neitzel Luke & Salopek Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.

As 2021 winds down, we want to share some key information related to Forms 1099. These tax documents are required to be filed with the IRS at the end of each January for the preceding calendar year. To avoid penalties for filing a late or inaccurate Form 1099 you should consult with your tax advisor to ensure compliance with the Internal Revenue Service rules.

Overview

There are different types of 1099s that your business, or you as a sole proprietor, may be required to file with the IRS. The due date for Forms 1099 applicable to calendar year 2021 is January 31, 2022.

Below are examples of Forms 1099 that you may be required to file. Note that this list is not inclusive of all types of Form 1099:

1099-NEC: used to report Non-Employee Compensation (NEC) paid in excess of $600. A payment is considered NEC if you made a payment to someone who is not your employee but performed work for you, such as an independent contractor.

1099-MISC: used to report types of income that are not considered NEC, such as Royalties, Other income payments, and Nonqualified Deferred Compensation, among other types of income. Royalty payments in excess of $10, and payments in excess of $600 for other income types, trigger the requirement to file Form 1099-MISC.

1099-INT: used to report Interest Income payments in excess of $10, or in some cases, $600.

Do I have to file 1099s for tax year 2021?

You are required to file Forms 1099 if you made payments over the above-indicated dollar amounts in the course of your trade or business to an individual, partnership or estate.

What information do I need from the payee to file Forms 1099?

If you are required to file Forms 1099, you will need the following information from the payee:

• Legal name used for Federal income tax purposes
• Address
• Federal Employer Identification Number or Social Security Number, whichever is applicable

The best way to obtain the information needed is to ask your vendors and payees to complete a Form W-9, which can be found here.

If you believe that your business or you as a sole proprietor may be required to file Forms 1099 for tax year 2021, consult your tax advisor. Neitzel Luke & Salopek Inc. is available to answer any questions you have and to prepare your Forms 1099. We can be reached at (440) 835-1040 or email Lisa Parente, Tax Manager at LParente@nlacpas.com to get in touch.

Sources: Instructions for  Forms 1099-MISC  and 1099-NEC (2020) | Internal Revenue Service (irs.gov)