Principles of Municipal Income Tax Reform
The Ohio Municipal Income Tax Reform required municipal corporations levying income tax to amend their existing tax ordinances as of January 1, 2016. The rules of this reform are streamlined for all taxing cities. This tax reform was effective for taxable years beginning on or after January 1, 2016 with the exception of new net operating loss carryforward provisions which are effective for taxable years on or after January 1, 2017. One group of taxpayers that may not realize the impact the reform has on them is realtors. When the reform was introduced, most of the focus was on the larger changes impacting all taxpayers which is why the changes impacting realtors may have gotten overlooked by some.
Real Estate Commissions and Expenses
The updated Ohio Revised Code Section 718.02 (F)(1) states that: Commissions received by a real estate agent or broker relating to the sale, purchase, or lease of real estate shall be sitused to the municipal corporation in which the real estate is located. Essentially, you have to source the real estate commissions you earn to the city where the property sold was located. For example, if a realtor sold houses in Lakewood, Akron and Avon, the realtor would now have to file city tax returns in all of those cities in addition to their residence city.
Net profit reported by the real estate agent or broker is allocated to a municipal corporation based upon the ratio of the commissions the agent or broker received from the sale, purchase, or lease of real estate located in the municipal corporation to the commissions received from the sale, purchase, or lease of real estate everywhere in the taxable year. For example, if a realtor had net profit of $50,000 ($100,000 of commissions earned less $50,000 of expenses), the realtor would allocate the net profit of $50,000 based on the cities the commission revenue was earned in. If real estate commissions earned were $25,000 from the sale of a house in Cleveland and $75,000 from the sale of a house in Akron, the net profit would be allocated as follows:
- Akron net profit $37,500 (Akron commissions $75,000 / Total commissions $100,000 = 75% * total net profit $50,000)
- Cleveland net profit $12,500 (Cleveland commissions $25,000/Total commissions $100,000 = 25% * total net profit $50,000)
The updated Ohio Revised Code Section 718.02 (F)(2) states: An individual who is a resident of a municipal corporation that imposes a municipal income tax shall report the individual's net profit from all real estate activity on the individual's annual tax return for that municipal corporation. The individual may claim a credit for taxes the individual paid on such net profit to another municipal corporation to the extent that such a credit is allowed under the municipal income tax ordinance, or rules of the municipal corporation of residence. This means that total net profit is reported on the taxpayer’s residence city tax return but they can take credit for taxes paid to other cities based on the credit limit that is allowed in the residence city.
The reform changes listed above will have a significant impact on realtors. The tax reform will place a larger compliance burden on the realtor as most realtors will have to file city tax returns in a lot of new cities starting in 2016. In addition, realtors will need to be tracking and paying estimates to avoid potential penalties and interest fines. It is important for realtors to track commissions by city and to determine if the address of the property is located in a taxing or a non-taxing city. This can be done using “The Finder” on the Ohio Department of Taxations website. Overall, the largest impact will be that most realtors will have an increase in city tax expense, which is dependent on their residence city tax rate and credit structure.
Due Dates, Estimates and Other Provisions
City tax returns are due on April 15th for calendar year taxpayers. City tax returns will be automatically extended to October 15th if they have filed a Federal extension on time. There is a minimum estimated tax threshold and quarterly payments must be made if the tax will exceed $200 for the year ($50 per quarter) after withholdings. These estimate due dates are 4/15, 6/15, 9/15, and 12/15. There is no remittance of tax required if the tax as shown on the return is less than $10. The law provides for penalties at the discretion of the tax administrator, and the interest rate charged on delinquencies, underpayments, and refunds is the federal short-term rate plus 5% (2016 is 5% and 2017 is 6%).