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1. Who should file Ohio form IT 4708, and who should file Ohio form IT 1140?
The PTE files form IT 4708 and pays the tax on behalf of noncorporate investors; investors who are corporations and are still required to file the corporate franchise tax cannot participate in the filing of form IT 4708. The PTE must file form IT 1140 and withhold the tax for qualifying investors that cannot or will not authorize the PTE to file form IT 4708 on their behalf.
2. Can a PTE file an Ohio form IT 4708 composite return on behalf of nonresident individual qualifying investors and an Ohio form IT 1140 PTE return for the remaining nonresident individual qualifying investors who have not elected to be included in the composite return?
Yes. Both returns can be filed in the same year but should include different investors for each return.
3. Is a PTE subject to filing the Ohio form IT 1140 if all of its nonresident equity investors file Ohio form IT 1040 returns?
Yes. The current law does not provide any exemption for the PTE even if each investor is currently filing the Ohio form IT 1040. Note, however, that the law does provide such an exemption with respect to corporations that are not considered qualifying investors (see item #12 on page 4 of the 2010 general instructions for Ohio form IT 1140).
4. Can an Individual Investor file an IT 1040 when the investor has been included in an IT 4708 Composite Pass-Through Entity Return?
If a non-resident individual investor has Ohio-sourced income or loss other than that earned through the pass-through entity that filed an IT 4708 on their behalf and is required to file an Ohio individual income tax return, IT 1040, then the individual non-resident investor is entitled to a refundable credit on the IT 1040 return. The credit is equal to the investor’s proportionate share of the tax paid by the pass-through entity on behalf of the investor and as such, will be allowed a credit for the taxes paid per R.C. 5747.08(J).
However, if a non-resident individual investor included in a composite return has no Ohio-sourced income or loss other than that earned through the pass-through entity that filed an IT 4708 on their behalf, the individual cannot file an IT 1040 return and is not entitled to the refundable pass-through entity credit pursuant to R.C. 5747.08(J).
5. If a nonresident individual qualifying investor is included in Ohio form IT 1140, is the individual required to file the IT 1040 Ohio individual income tax return?
Yes, the IT 1140 is a withholding form. The individual is required to file an IT 1040 and claim the withholding.
6. If a nonresident individual invests in several Ohio PTEs: (a) Can the nonresident individual be included in an Ohio form IT 4708 for some PTEs and included in the Ohio form IT 1140 for others? (b) Does the answer change if the PTEs are related?
(a): Yes. The PTE can file the IT 4708 and or the IT 1140. The individual can be included in an IT 1140 for one PTE and can elect to be made part of an Ohio composite return for another PTE. As a result, the composite election is binding and irrevocable for the taxable year the election is made and each year stands on its own (see R.C. 5747.08(D) (3)). The taxpayer is required to file an IT 1040 if Ohio source income has been withheld on and reported on an IT 1140.
(b): No.
7. What prevented the tax department from mandating that all pass-through entities file form IT 4708 for its nonresident investors rather than allowing an option for filing form IT 1140?
Ohio Revised Code Section 5747.08 (D), does not allow C corporations to participate in the filing of the IT 4708. Reason: There are concerns that corporations might manipulate the apportionment factors to avoid paying the appropriate amount of tax. Thus, the law had to provide for a return (IT 1140) which the pass-through entity could file on behalf of qualifying investors which are corporations.
8. Many PTEs can file either Ohio form IT 4708 or IT 1140. Since actual payments can be transferred from one return to the other for the same taxpayer, shouldn't the tax due computed on both returns be the same?
No. The Ohio taxable income on form IT 4708 is taxed at the highest individual income rate of tax set forth in Ohio Revised Code Section 5747.02. Ohio Revised Code Section 5747.41 states that the IT 1140 tax rate is only 5% for qualifying investors who are individuals. While some maintain that the rates should be the same, the law does not provide for the same rates.
9. Can a PTE utilize a credit received by another PTE in which the Pass-through is an investor?
If a pass-through entity or trust has invested in a partnership or limited liability company that also filed Ohio form IT 1140, the pass-through entity or trust is not entitled to any credit for the pass-through entity’s or trust proportionate share of tax. Furthermore, the pass-through entity or trust cannot claim the credit as an estimated payment for the pass-through entity’s or trust’s taxable year.
However, the pass-through entity or trust can “pass through” (via the K-1s it will issue) to its qualifying investors or to its qualifying beneficiaries the pass-through entity’s or trust’s proportionate share of such tax that the investee partnership or investee limited liability company paid on behalf of the pass-through entity or trust.
10. Provide an example of a completed Ohio form IT 4708 which sets forth an amount on line 19, pass-through entity credit.
Form IT 4708 Computation---PTE #1 |
|
Income apportioned to Ohio |
$50,000 |
Income allocated to Ohio |
0 |
Ohio Taxable Income |
$50,000 |
Times: tax rate for year 2010 |
x.0624 |
Tax before credit(s) |
$3,120 |
Less: Line 19 "PTE Credit" |
(0) |
Tax after refundable credits |
$3,120 |
|
|
Form IT 4708 Computation---PTE A |
|
Income apportioned to Ohio ($175K + $25K) |
$200,000 |
Income allocated to Ohio |
0 |
Ohio taxable income |
$200,000 |
Times: tax rate for year 2010 |
x .0624 |
Tax before credit(s) |
$12,480 |
Less: Line 19 "PTE Credit" (50% X $3,120) |
(1,560) |
Tax after refundable credits |
$10,920 |
|
|
Form IT 4708 Computation---PTE B |
|
Income apportioned to Ohio ($275K + $25K) |
$300,000 |
Income allocated to Ohio |
0 |
Ohio taxable income |
$300,000 |
Times: tax rate for year 2010 |
x .0624 |
Tax before credit(s) |
$18,720 |
Less: Line 19 "PTE Credit" (50% X $3,120) |
(1,560) |
Tax after refundable credits |
$17,160 |
Notes:
(1) Because PTE A and PTE B equally own PTE #1, PTE A and PTE B must each include in income one-half of PTE #1's profit.
(2) PTE A and PTE B can each claim one-half of the form IT 4708 tax which PTE #1 paid.
11. Why can't PTEs owned by nonresident individuals who file and pay the Ohio IT 1040 provide a written statement agreeing they have nexus and are in compliance; thus exempting them from filing the IT 1140 much like corporations can?
The current law does not provide for this type of exemption for the PTE even if all the out-of-state individual investors are currently filing the Ohio form IT 1040. Please note Ohio Revised Code Section (R.C.) 5733.41 provides that if all the investors in a pass-through entity are (i) corporations subject to the Ohio Corporation franchise tax or subject to the franchise phase-out and or (ii) corporations that would be subject to the tax if not exempt (R.C). 5733.09, then the pass-through entity is exempt from the withholding and entity tax.
12. What is the department's position in a case where (a) the S-corporation or partnership has considerably less funds available than the distributive share and/or (b) by law the funds can not be used for withholding on a regular basis?
(a) The tax is based upon the distributive share of income. It is the responsibility of the pass-through entity to have the cash necessary to pay the tax even if this means (i) reducing the distributions to the investors and/or (ii) borrowing money. (b) Similarly, where federal statutes (for example, HUD housing partnerships) limit the frequency of cash distributions by the partnership to the investors, then the department has waived (and will continue to waive) the estimated tax payment requirements — but only the estimated tax provisions and not the yearly tax payment provisions.
13. Regarding interest income earned from a PTE: (a) Is PTE-earned interest income taxable to Ohio if the person is an out-of-state resident and (b) If the interest income is also taxed by another state, can the non-Ohio resident properly claim a credit on the Ohio individual income tax return?
(a) Yes. Generally, PTE-earned interest income is business income which is apportioned in and out of Ohio rather than completely allocated to the state of residency (regardless of whether the investor is a resident of a state contiguous to or not contiguous to Ohio).
(b) Regardless of whether or not such interest is taxed by another state, a nonresident individual filing the IT 1040 can claim the nonresident Schedule D credit with respect to (i) income that is not apportioned to Ohio and (ii) income that is not allocated to Ohio.
14. If the PTE is not subject to Ohio tax, what is the procedure for a nonresident investor to recover an amount erroneously withheld by a PTE and paid via Ohio form IT 1140ES?
If the PTE is not subject to Ohio tax, then there are two “avenues” for securing a refund:
15. Why was Ohio Revised Code Section 5747.08 (D) (1) (a) amended a few years ago to allow residents to file as members of a Ohio form IT 4708 composite return?
Practitioners wanted to be able to file one composite return on behalf of all investors included in a PTE, whether or not the investors were nonresidents. Note that (i) Ohio residents must still file Ohio form IT 1040 and (ii) nonresidents must file Ohio form IT 1040 if they have Ohio-sourced income for which a form IT 4708 has not been filed.
16. Is the PTE tax deductible for Ohio income and corporation franchise tax purposes?
Ohio law expressly states that if such PTE tax is deducted either for individuals/estate/trust income tax purposes or for corporation franchise tax purposes, such amounts must be added to FAGI or "Line 28” (IRS form 1120) income, respectively. This add back is applicable only to C corporations not subject to the franchise tax phase out.
17. Ohio form IT 1140, Schedule B, line 1 asks for the "Sum of all qualifying investors' distributive shares of income and gain." What lines from the IRS form 1065, Schedule K and IRS form 1120S, Schedule K, comprise "income and gain" on Schedule B, line 1?
For the 1065, Schedule K, lines 1 through 3 and 5 through 11 reduced by the related expenses on lines 12, 13(b), 13(c), 13(d) and 16(l).
For the 1120S, Schedule K, lines 1 through 10 reduced by the related expenses on lines 11, 12(b), 12(c), 12(d) and 14(l).
18. On Ohio forms IT 1140 (Sch. B, line 4) and IT 4708 (Sch. II, line 28), PTEs must add back the qualifying investors' shares of expenses and losses from transactions between the PTE and its related members. Please explain the reason for the add-back.
The add-back is required only for those related members for which there is at least a 40% relationship. For the purposes of this add-back, the definition of related member has the same meaning as in division (A) (6) of section 5733.042 except “forty percent” is substituted for “twenty percent”. The law requires this adjustment since we are concerned that PTE’s having nexus with Ohio would pay large fees to related members having no nexus with Ohio. Without the add-back, the PTE having Ohio nexus would have no profit and thus no tax.
An example of an inter-company transaction would be PTE Y having an Ohio apportionment factor of 1.00000 and owning 75% of PTE X having no Ohio nexus. PTE X receives a $100,000 “management fee” from PTE Y. Without the add-back, PTE Y's Ohio taxable income would be inappropriately reduced by $100,000.
19. In the example provided below, what is the effect of R.C. section 5733.40(A) (7) on Ohio's reciprocity agreements with other states?
Example: A related member nonresident shareholder of an Ohio S corporation lives in Michigan and works in Ohio as an employee of the S corporation.
5733.40(A) (7): For the purposes of R.C. Chapters 5733 and 5747, guaranteed payments made by a partnership or by a limited liability company that is not subject to the tax imposed by R.C. 5733.06 and compensation paid by an S corporation to its shareholders, shall be considered a distributive share of income of the partnership, limited liability company or S corporation. Division (A)(7) of this section applies only to such payments or such compensation paid to an investor who at any time during the qualifying entity’s taxable year holds at least a twenty percent direct or indirect interest in the profits or capital of the qualifying entity.
The department’s position is that the reciprocity agreements do not apply with respect to wages which an S corporation pays to a shareholder-employee if the shareholder-employee is a “20% or greater” direct or indirect equity investor in the S corporation. See, also, the final determinations for Paul M. & Annette E. Neumann and Timothy Hunt & Leslie Niepp issued on November 3, 2004 and June 3, 2005, respectively. The department did not notify the reciprocity states.
20. An Ohio resident who owns at least 20% of an S corporation is an employee of that S corporation and receives wages for services performed in Michigan. Does the reciprocity agreement between Michigan and Ohio apply to this shareholder-employee wages?
The state of Michigan must decide if such income is exempt for Michigan income tax withholdings (based upon Ohio Revised Code Section 5733.40(A) (7) such income is not “compensation” for Ohio income tax purposes). In any event, since Ohio residents are taxed on their world-wide income but receive a resident credit for income taxed by another state, this shareholder-employee can claim the credit if Michigan were to impose an income tax on such salary (and at this point we understand that Michigan would treat such income as income sitused entirely to Ohio in accordance with the reciprocity agreement)..
21. What is a "related member"? Can you provide an example?
Generally, a “related member” is any person (individual, corporation, partnership, etc.) who directly or indirectly owns at least 20% or more of another entity RC. 5733.42(A)(6). An example would be Fiat and Chrysler since Fiat now owns more than 50% of the stock of Chrysler, the two corporations are related members.
22. Is Form FT 1120 S (Notice of S Corporation Status) required for tax years after 2009?
No. The Office of the Tax Commissioner issued a waiver of “notice of S election” reporting requirements for S corporations for corporation franchise tax year 2010 and tax year 2011 by a Journal Entry dated October 19, 2010 and Journal Entry dated October 12, 2011
However, starting with tax year 2009, the investor information will be incorporated into the pass-through entity returns (see forms IT 1140 and IT 4708 for more information). These forms are located on our Web site by clicking here and choosing "Pass-Through Entity Tax". Please note that if the pass-through entity has all full-year Ohio resident investors, the entity is not required to file the IT 4708 or the IT 1140 and this investor information will not be reported on these forms
