The US Tax Court on October 18, 2023, handed an unfavorable decision to the Estate of James A. Caan, believed to be the famous Hollywood actor who died July 6, 2022. Caan held a non-tradeable partnership interest in his IRA. The IRA custodian, UBS, pursuant to its custodial agreement, required an annual valuation of that interest so that it could meet its reporting requirements to the IRS (Form 5498). When Caan failed to provide such a valuation, UBS distributed the partnership interest to Caan and reported that on a 2015 Form 1099-R. Caan liquidated the partnership interest outside of the IRA and attempted to claim non-taxable rollover treatment by contributing the cash to a new IRA (the new custodian was Merrill Lynch) more than one year later (i.e., not within the 60-day window for rollovers). The IRS denied a favorable private letter ruling (requested by Caan seeking a waiver of the 60-day window), citing that the partnership interest itself was required to be transferred to Merrill for the rollover rule to be applicable. That proved to be a $1.5M income hit for Caan.
In our practice, we have found that abiding by custodial agreements is challenging for clients who choose to hold non-traded financial instruments inside an IRA. The challenges stem from clients not wanting to pay for annual valuation reports, and when required minimum distributions are at issue, there may be insufficient liquidity in the IRA. Sometimes producing the valuation report itself is a challenge insofar as recalcitrant CFOs of these non-public entities who do not want to share financial information with their investors.
On July 4, 2023, Ohio Governor Mike DeWine signed House Bill 33, the state’s biennial budget bill, into law. This law enacts multiple changes to Ohio’s tax structure, including changes to the Commercial Activity Tax (“the CAT”), a reduction in the personal income tax, changes to municipal tax filings, and a resident credit for pass-through entity taxes paid to other states. The changes are generally effective for tax years beginning on or after Jan. 1, 2023.
Prior to House Bill 33 being signed into law, taxpayers with gross receipts less than $150,000 were exempt from filing and registering for the CAT. For tax years beginning in 2024 taxpayers with taxable gross receipts under $3,000,000 will be exempt from the CAT. The exclusion increases from $3,000,000 to $6,000,000 for tax years beginning in 2025. The tax rate of 0.26% continues to apply to Ohio taxable gross receipts above the respective exclusion amounts. Notably, House Bill 33 did not remove the filing and registration requirement for taxpayers with over $150,000 of taxable gross receipts. Therefore, taxpayers with gross receipts in excess of $150,000 and below the exclusion amount will still be required to file $0 returns. We are awaiting guidance from the Ohio Department of Taxation to see if administrative relief will be available for taxpayers in this situation.
House Bill 33 reduced the number of personal income tax brackets from four to two. Taxpayers with Ohio taxable income under $26,050 will pay $0 in tax. For tax year 2023, taxpayers with income over $26,050 will pay $360 on the first $26,050 of income and will be subject to tax at a rate of 2.75% for income between $26,050 and $100,000, a rate of 3.688% on income between $100,000 and $115,300, and a top rate of 3.75% for income over $115,300. For tax years beginning in 2024, the 3.688% bracket is eliminated and the top rate reduced to 3.5% such that taxpayers with income over $100,000 will be subject to tax at a rate of 3.5% on income exceeding $100,000. The tax rate on business income passed through to individuals remains at 3% after the $250,000 exclusion.
H.B. 33 reduces the late filing penalty from $150 to $25 for municipal income tax filings and requires the penalty to be abated or refunded on a taxpayer’s first late filing once the return is filed. The law also extends the extended due date of municipal net profits tax returns from Oct. 15 to Nov. 15. Finally, the law allows a modified apportionment formula to reduce compliance costs of employers with remote or hybrid employees. The taxpayer may elect to apportion any property, payroll, or sales attributable to that employee to a designated location owned or controlled by the taxpayer or the taxpayer’s customer. This change applies only to the net profits tax and does not impact the employer’s withholding requirements.
In an effort to limit double taxation on Ohio resident owners of pass-through entities, H.B. 33 allows for a resident to claim a resident credit for pass-through entity taxes paid to another state while requiring an addback of those taxes deducted on an individual’s federal adjusted gross income. The provision is effective for tax years ending on or after Jan. 1, 2023; but taxpayers are allowed, at their election, to apply these provisions for tax years ending on or after Jan. 1, 2022, through the filing of an originally filed or amended return.
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Hanna Hauer has been promoted to Senior Associate effective immediately. Hanna started as an intern with MMB in the summer of 2021 and joined MMB as a full-time associate upon her graduation from Indiana University’s Kelley School of Business in the spring of 2022. Throughout her tenure at MMB, Hanna has provided exceptional client service and has been a thought leader among her peers. She is currently sitting for the Ohio CPA examination.