1. Auditing Business Returns Schedule Y
OML Tax Conference
July 12, 2018

2. Business Returns
HB 5 and other “Uniformity” law changes made the Audit of a Business Net Profit return basically a reconciliation of the local business return to the federal return.
Definition of AFTI
Cincinnati focus on reviewing Schedule Y The Business Allocation Formula
ORC

3. Why focus on Schedule Y? 718.02 (B)
Tax Administrator may REQUIRE an alternative apportionment method.
Fair and Equitable Standard
Language allows for much interpretation.
Limited access to accurate data
Time consuming

4. We will need to change “nonresidents” to businesses

5. Schedule Y Property Payroll Point of Sale Three Factors– 3 P’s
Question- What if business has no Employees
Do you use two or three factors?
In a meeting with Mayor Cranley on HB5 and the “throwback rule” that he spoke about during HB5.

6. Step 1-Property Explanation
ORIGINAL COST- (Net Book Value)
Real and tangible personal property
Examples of tangible personal property are computers, furniture, tools, machinery, signs, equipment, leasehold improvements, supplies, and leased equipment.
Owned or USED
Rental Values – Annual Rent * 8
Has anyone ever looked into the values companies provide in Step 1?
What about leased office machines?
Billboards?

7. Step 1-Property Audit Items
Mobile Asset Rule- Cincinnati Pre-HB5 Regs.
The basis for allocation of the value of motor vehicles, as well as other mobile equipment is on the actual time used in the trade or business in generating the sales so reported in Step 3. If no records of the time the equipment is used in and out of the Municipality are available, the sales factor percentage is to be used as the determinant for mobile equipment in Step 1.
Review when Step 1 is 0% or very low relative to the other Steps.
Example-Contractors
Mobile Assets- Cars, Trucks, Equipment, Cranes, Backhoes….

8. Sample Mobile Asset Rule As Filed
Everywhere Cincinnati % Step 1 Property Rents NA Step 2 Wages Step 3 Sales 1, Total Average 27.78

9. ADJUSTED Everywhere Cincinnati % Step 1 Property 300 0 50.00
Step 2 Wages
Step 3 Sales 1,
Total
Average

10. Step 1-Property Discovery Opportunity
Rents Paid- If Significant Amount
Request Name, Address, Amount Paid and Tax ID for those recipients of Real Estate Rents and/or Leases in the City.
Might find non-filers of rental income.
If Amounts are Significant
Especially if Real Estate

11. Step 2 Payroll (A) (2)
Wages, salaries, and other compensation paid during the taxable period to individuals employed in the business or profession for services performed in the municipal corporation to wages, salaries, and other compensation paid during the same period to individuals employed in the business or profession, wherever the individual's services are performed, excluding compensation from which taxes are not required to be withheld under section of the Revised Code;

12. Step 2-Payroll Explanation
Wages earned by individuals employed in City
Does not include wages (20 Day Rule)
Does not include subcontractors or independent contractors
Questions:
Employees of company only? (C)
Include Guaranteed Payments to Partners?
How do you deal with Leased Employees, Paymasters, other third party providers?
What about PPB
Our Code specifically excludes subcontractors or independent contractors.
(C) As used in division (A)(2) of this section, "wages, salaries, and other compensation" includes only wages, salaries, or other compensation paid to an employee for services performed at any of the following locations:
(W) "Employee" means an individual who is an employee for federal income tax purposes.
§ (c)-1 Employee- Employee- employer relationship

13. Step 2-Payroll Audit
Compare Wages in Municipality to the amount of Wages subject to Withholding Tax in Municipality
EX: Cincinnati payroll as reported per your 2017 Cincinnati Income Tax Return, Schedule Y, Step 2 $500,000 is not in agreement with wages withheld on for the same period of $57,000. Please advise as to the difference or remit additional tax due.
WARNING- You might find that the company is overstating their Schedule Y.
Especially true in Cincinnati - Tri-State area - Cincinnati Postal Code is used by businesses
Two different departments within the business

14. Step 3- Sales Explanation
Sales- Throwback Rule- Discussed later
Gross Receipts-Everywhere Amounts should be easily verified from the Federal Return
Rentals- In Cincinnati we make every effort to have the taxpayer exclude rents and separately report profit/loss after allocation.
Services- Where performed.
We use to require reconciliation- not so much now.

15. Step 3- Sales Audit
Pre “Throwback” elimination---If Sales % was very low in respect to other two factors we would ask “How are sales solicited and by whom?”

16. Alternative Method Language
(B) (1) If the apportionment factors described in division (A) of this section do not fairly represent the extent of a taxpayer's business activity in a municipal corporation, the taxpayer may request, or the tax administrator of the municipal corporation may require, that the taxpayer use, with respect to all or any portion of the income of the taxpayer, an alternative apportionment method involving one or more of the following:
(2) A taxpayer request to use an alternative apportionment method shall be in writing and shall accompany a tax return, timely filed appeal of an assessment, or timely filed amended tax return. The taxpayer may use the requested alternative method unless the tax administrator denies the request in an assessment issued within the period prescribed by division (A) of section of the Revised Code.

17. Alternative Method Procedures-Per Cincinnati Regulation R-17
Prefer the request be made before the return is filed
Prefer the request is submitted directly to Tax Commissioner- The Commissioner will respond in 60 days
Prefer taxpayer use Certified/Registered Mail
Pre HB5 Approved methods remain in tact
Tax Commissioner has three years to deny the method.

18. Case Study April 2016 T/P Requested using Single Factor -Sales Only
Claim-Profits distorted because R&D and Admin in Cinti
Said they would now include “throwback sales”
“throwbacks” were already to be included
Pending legislation may require exclusion
Denied Request but can reapply when return filed.
September 2017 Return filed- Denied- Issued Assessment
Appealed Assessment- Requested Solicitor’s Opinion- Negotiated Settlement
Property and Payroll factors were adjusted and they agreed to continue including royalty income.
Taxpayer has a global presence
Denied because did not show business model required any adjustments

19. Contact Information
Ted Nussman Tax Commissioner City of Cincinnati (513)