Net Operating Losses and Offset Provisions Art Preiksa, Akron Scott Dunford, RITA Mike Ryba, CCA-Division of Taxation

NOL-related Definitions: 718.01(A)(1) "Municipal taxable income" means the following: (a) For a person other than an individual, income apportioned or sitused to the municipal corporation under section 718.02 of the Revised Code, as applicable, reduced by any pre-2017 net operating loss carryforward available to the person for the municipal corporation.

What is a Pre-2017 NOL? 718.01(SS)(1) "Pre-2017 net operating loss carryforward" means any net operating loss incurred in a taxable year beginning before January 1, 2017, to the extent such loss was permitted, by a resolution or ordinance of the municipal corporation that was adopted by the municipal corporation before January 1, 2016, to be carried forward and utilized to offset income or net profit generated in such municipal corporation in future taxable years.

2017 and Forward NOL reference: 718.01(D)(2) "Net profit" for a person other than an individual means adjusted federal taxable income reduced by any net operating loss incurred by the person in a taxable year beginning on or after January 1, 2017, subject to the limitations of division (D)(3) of this section.

Compare this with 718.01(A)(1) (A conflict): 718.01(D)(3)(d): Any pre-2017 net operating loss carryforward deduction that is available may be utilized before a taxpayer may (emphasis added) deduct any amount pursuant to division (D)(3) of this section.

The 50% Rule: 718.01(D)(3)(c)(i): For taxable years beginning in 2018, 2019, 2020, 2021, or 2022, a person may not deduct, for purposes of an income tax levied by a municipal corporation that levies an income tax before January 1, 2016, more than fifty per cent of the amount of the deduction otherwise allowed by division (D)(3) of this section.

What about the “remaining 50%”? (Good to know before going further) 718.01(D)(3)(e) Nothing in division (D)(3)(c)(i) of this section precludes a person from carrying forward, for use with respect to any return filed for a taxable year beginning after 2018, any amount of net operating loss that was not fully utilized by operation of division (D)(3)(c)(i) of this section. To the extent that an amount of net operating loss that was not fully utilized in one or more taxable years by operation of division (D)(3)(c)(i) of this section is carried forward for use with respect to a return filed for a taxable year beginning in 2019, 2020, 2021, or 2022, the limitation described in division (D)(3)(c)(i) of this section shall apply to the amount carried forward.

When does the 50% limit change to 100%? 718.01(D)(3)(c)(ii) For taxable years beginning in 2023 or thereafter, a person may deduct, for purposes of an income tax levied by a municipal corporation that levies an income tax before January 1, 2016, the full amount allowed by division (D)(3) of this section without regard to the limitation of division (D)(3)(b)(i) of this section.

So…what do we do? When are the respective NOL’s included in the calculation? 718.01(A)(1) indicates that the 2017+ NOLs are considered before any pre-2017 NOLs. 718.01(D)(3)(d) indicates that any pre-2017 NOL may be utilized prior to the 2017+ NOLs.

So…what do we do? 718 now allows NOLs as a deduction before apportionment, yet: Pre-2017 NOLs were calculated on a post apportionment basis; “Net Profit” means “AFTI” reduced by any unapportioned NOL incurred by the taxpayer in a taxable year beginning on or after 1/1/17.

Example 1 Single municipality with an ordinance in effect prior to 1/1/16 which allowed NOL carry-forwards. 2% tax rate. 2016: ABC Company has $20 post-apportionment NOL. Apportionment for the municipality was 50%. 2017: ABC Company has a pre-apportioned NOL of $50. Apportionment for the municipality was 30%. 2018: ABC Company has pre-apportioned $200 net profit. Apportionment for the municipality was 75%.

Example 1 – Complex Calc

Example 1 – Simple Calc

So, which calc is “right”? Both are reasonable Since there is no definitive calculation within the law, both are defensible. The “simple” calc is easier to implement, easier to train your staff on, and easier to apply on a consistent basis. Until challenged, utilize the “simple” calc (tax preparers may appreciate the simpler method).

Example 2 Single municipality with an ordinance in effect prior to 1/1/16 which did not allow NOL carry-forwards. 2% tax rate. 2016: ABC Company has no allowable NOL. Apportionment for the municipality was 50%. 2017: ABC Company has a pre-apportioned NOL of $50. Apportionment for the municipality was 30%. 2018: ABC Company has pre-apportioned $200 net profit. Apportionment for the municipality was 75%.

Example 2 – Complex Calc

Example 2 – Simple Calc

Example 3 Single municipality without an ordinance in effect prior to 1/1/16. 2017 effective ord with a 2% tax rate. 2016: ABC Company has no filing obligation. 2017: ABC Company has a pre-apportioned NOL of $50. Apportionment for the municipality was 30%. 2018: ABC Company has pre-apportioned $200 net profit. Apportionment for the municipality was 75%.

Example 3 – Complex Calc

Example 3 – Simple Calc

Resident Schedule Income & Loss Offsets Scott Dunford Individual Tax Processing Manager Regional Income Tax Agency

Resident Schedule Income & Loss Offsets A Little History…. Allows for current year offsetting of all Schedule income and losses of residents of taxing municipalities for residence tax purposes. i.e. All Schedule Income & Losses are in “one bucket” for offsetting purposes. Includes Schedule C, E & F owned by the resident. Includes pass-through income & losses of the resident. S Corporation limitations for residence tax purposes still apply – Income or losses of S corporations do not flow to an owner unless the owner lives in a municipality that voted in 2003 or 2004 to permit taxation of S corporation owners.

Resident Schedule Income & Loss Offsets Net “Schedule Bucket Losses” cannot offset Qualifying Wages. NOL CF & Phase-in Provisions apply when net total “Schedule Bucket” is loss. NOL CF cannot offset Qualifying Wages. Does not apply to Schedule income earned by non-residents in non-resident municipality. Non-residents must file and pay on Schedule C, E & F income in municipality where income is earned. NOL CF & Phase-in Provisions apply.

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Pre H.B. 5 “Two Bucket Method” Unapportioned Schedule Activity -“Bucket 1” Cleveland Heights Resident Schedule C loss in Cleveland Heights – ($10,000) Township Schedule E rental income - $25,000 Florida Partnership distributive share loss - ($6,000) = Total Unapportioned income of $9,000

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Pre H.B. 5 Apportioned Schedule Activity -“Bucket 2” Cleveland Heights Resident Taxing Muni A Partnership – $15,000 Taxing Muni B Rental – ($22,000) Taxing Muni C Rental – $4,000 = Total Apportioned Loss of ($3,000)

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Pre H.B. 5 “Two Bucket Method” Residence Non-taxing Total Taxing Muni Muni Locations A B C Cleveland Heights $(10,000) $ (10,000) Township A $ 25,000 $ 25,000 Florida $ (6,000) $ (6,000) Total Unappoortioned ("Bucket 1") $ 9,000 Taxing Muni A $ 15,000 $ 15,000 Taxing Muni B $ (22,000) $ (22,000) Taxing Muni C $ 4,000 $ 4,000 Total Apportioned ("Bucket 2") $ (3,000) Net Unapportioned Schedule Income Subject to Res Tax

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Pre H.B. 5 Cleveland Heights Resident Total Taxable Residence Schedule Income = $9,000

Resident Schedule Income & Loss Offsets Example 2 – RITA Resident Current Law “One Bucket Method” Cleveland Heights Resident Schedule C loss in Cleveland Heights – ($10,000) Township Schedule E rental income - $25,000 Florida Partnership distributive share loss - ($6,000) Taxing Muni A Partnership – $15,000 Taxing Muni B Rental – ($22,000) Taxing Muni C Rental – $4,000 =Net Total of $6,000 Subject to Residence Tax

Resident Schedule Income & Loss Offsets Example 2 – RITA Resident Current Law “One Bucket Method” Residence Non-taxing Taxing Muni Total Muni Locations A B C Cleveland Heights $(10,000) $ (10,000) Township A $ 25,000 $ 25,000 Florida $ (6,000) $ (6,000) Taxing Muni A $ 15,000 Taxing Muni B $ (22,000) $ (22,000) Taxing Muni C $ 4,000 $ 4,000 Net Total Schedule Income Subject to Residence Tax $ 6,000

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Current Law Cleveland Heights Resident Total Taxable Residence Schedule Income = $6,000 Worksheet “L” from the RITA form 37 would be completed to determine resident credit on income taxed in other Municipalities.

Resident Schedule Income & Loss Offsets RITA Form Evolution. 2015 form used “two bucket” method. Income and loss in each bucket (Apportioned and Unapportioned) offset across, but never offset each other.

Resident Schedule Income & Loss Offsets RITA Form Evolution. 2016 Form changed to Single “bucket” allowing offsets of apportioned and un-apportioned income for residence tax. Also in 2016, introduced worksheet L to apportion losses against gains for residence tax credit.

2016 Worksheet L

Resident Schedule Income & Loss Offsets RITA Form Evolution. 2017 Form changes: Moved Resident Loss Carry Forward box to allow for a single entry. Retained and adjusted worksheet L. Added Schedule P for Non-resident Pass through income/loss. Added worksheet “R” to compute accurate partnership payment credit on resident PTE income/loss.

2017 RITA Schedule J

2017 RITA Worksheet L

2017 RITA Schedule P and Worksheet R

2018 Form – What’s Next? Add a worksheet to reconcile pre and post 2017 losses to the amounts claimed on the form. Add lines to Schedule J accommodate NOL CF phase in. Pre-2017 NOL CF allocation. 2017 NOL CF allocation and limitation. Other Minor tweaks identified from the 2017 season.

Contacts Art Preiksa, Tax Commissioner City of Akron (p): 330-375-2527 (e): Apreiksa@akronohio.gov _______________________________________________________________________________ Scott Dunford, Tax Processing Manager RITA (p): 440-922-3203 (e): sdunford@ritaohio.com Mike Ryba, Chief of Audit CCA – Division of Taxation (p): 216-664-4416 (e): mryba@city.cleveland.oh.us