Business and nonbusiness income are important concepts in Ohio tax law. Business income refers to the apportionable income among states where the taxpayer’s business is conducted, and it is generated from the business’ operations. Ohio nonbusiness income refers to the earnings allocated to the business’ state of domicile which is generally produced outside of normal business operations. Ohio law favorably taxes business income at a flat 3% and provides for a business income deduction. These tax treatments are not available to nonbusiness income.

Previously, the Ohio Department of Taxation’s position was that the sale of a business interest did not qualify as business income, subject to the favorable flat tax rate and business income deduction, despite the statutory definition of business income including proceeds from a liquidation of a business interest. Taxpayers that claimed business sales’ proceeds as business income, along with claiming the corresponding deduction, were challenged by the Department of Taxation, sometimes resulting in litigation.

To help resolve the disputed interpretations of liquidation proceeds and sales proceeds, HB 515 now provides two scenarios in which income from the sale of an equity interest in a business definitively constitutes business income eligible for the corresponding deduction: (i) if the equity sale is treated as an asset sale for federal income tax purposes (for example, an Internal Revenue Code §338(h)(10) election was made); or (ii) if the seller materially participated in the business activities during the year in which the business is sold, or in any of the five years preceding the sale. Satisfying either of these scenarios will enable the taxpayer to claim the business sales proceeds as business income in Ohio.

It is important to note that legislation is intended to be remedial, such that it will apply to petitions for reassessment, refund applications, and appeals pending on or after HB 515’s effective date, as well as to any sales transaction that is subject to audit on or after HB 515’s effective date.

If you are contemplating the sale of an Ohio business, we welcome the opportunity to speak with you and discuss the impact of HB 515 on your potential transaction, as well as how McCarthy Lebit’s Mergers & Acquisitions team can further assist you with a successful transaction.

Please reach out to request a consultation or call us at 216-696-1422.

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In an attempt to reduce the cost of prescription drugs and decrease the national deficit, the Biden administration intends to transform the tax infrastructure of high-income Americans. Specifically, the proposed BBBA increases the taxes of Americans who make more than $400,000 annually and assesses a new surtax on multi-millionaires and billionaires. The BBBA also plans to close the Medicare self-employment tax loophole by strengthening the net investment income tax for those making over $400,000 per year. The result of the BBBA is offsets estimated up to a total of $1,995 billion.

Consistent with the impact on large corporations and high-income Americans, the BBBA plans to strengthen the middle class by investing in affordable housing, higher education, and high-quality care for children, the elderly, and people with disabilities. The BBBA also presents the most cutting-edge climate change bill in American history.

Although the BBBA is being zealously promoted by the Biden administration, the transformative spending framework faces certain challenges ahead, as the Democrats only hold a razor thin majority in Congress. Please be patient and do not hesitate to contact us with any questions or concerns about your specific situation.

The post Revised Framework for “Build Back Better Act” Shifts Focus to Corporate and Individual Tax Rates appeared first on McCarthy Lebit - A Cleveland/Ohio Law Firm.

1. Are you renting?

If you currently rent your apartment or home, rather than own it, take the time to look through the hefty stack of papers your landlord had you sign prior to move-in. Keep in mind your lease is unlikely to contain specific references to Airbnb, but instead include information about utilizing your property for short-term rentals or “subletting,” which means the tenant rents his or her property to someone else during his or her lease. Your lease may allow subletting, directly prohibit it, or require a signed agreement with your landlord. In addition to thoroughly reading through the paperwork, consult with your landlord to make sure you won’t be creating any violations, and be prepared for the possibility of giving up a percentage of profits.

2. Are you part of a homeowner’s association or condo-owner’s association?

Once again, the document you signed lays out the regulations. If you are a part of a homeowner’s association or a condo-owner’s association, locate the governing documents and take time to read them thoroughly. The terms of these documents may explain whether you can list your unit on Airbnb, and if you can, how long you can do so, among other restrictions.

3. Are you violating zoning provisions?

Every city’s zoning ordinances are unique, so you need to fully review the provisions affecting your home. You may be in an area that your city has zoned to accommodate only single-family residences, exclude use of a commercial property for commercial activity or require a business license. In addition, the zoning code may determine how many renters or rooms rented you may have simultaneously. There could also be regulations for how long you may rent to any one person, whether you must occupy the home while renting it out, or if you can rent your entire home to guests. If you are prohibited from renting the property, you can potentially apply for a variance with the city that will allow you to rent through Airbnb. Keep in mind you may be penalized if caught violating your city’s ordinances.

4. What if someone gets hurt?

Let’s say you successfully list your property on Airbnb and someone gets injured while staying at your place. If you think it will solely be your guest’s fault regardless of what occurred, think again. You can still be held liable as the tenant or the owner in this scenario. You might think nothing serious will happen, but remember, you know the unit better than anyone, including a loose handrail or extra step outside the door. Even if you have homeowner’s or renter’s insurance, your policy may not cover injuries sustained by tenants or incidents occurring on your property due to conducting commercial activity. Consider your insurance policy and the possibility of piling medical bills before you decide to list your property to avoid a financial disaster.

5. Do you know how to account for rent received for tax purposes?

If you are renting rooms within your home in exchange for cash, you need to know what constitutes income; otherwise you can run into problems with taxing authorities. Determining tax consequences is not as simple as it sounds, because you will need to consider factors like: (a) how many days of the year is it rented; (b) do you normally live there; (c) how much of your house are you renting; and (d) what expenses can you claim as deductions? In addition to the amount being considered income, certain city ordinances impose transient taxes for short term rentals. There may be other taxes that apply as well depending on your city’s ordinances. Regardless, you should fully understand the tax consequences prior to renting the unit to ensure compliance and prevent future penalties.

Although the idea of renting out your unit on Airbnb appears to be seamless, there are a number of factors to consider. Contact one of our real estate or tax attorneys today to see how these factors affect you and your potential rental unit.

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