FAQ

Privilege tax levied on each person with “taxable gross receipts” for the privilege of doing business in Ohio, measured by taxable gross receipts.

• Not a sales tax.
• Not an income tax.

Broad base, low rate (.0026), with “few” exclusions.

• A person with “substantial nexus” is subject to the CAT and must file and pay the CAT. Substantial nexus means any of the following:
  • Owns or uses its capital in Ohio;
  • Authorized to do business in Ohio;
  • Has “bright-line presence” (BLP) in Ohio; or
  • Otherwise has nexus under the Constitution of the United States.
• “Bright-line presence” means any of the following:
  • $50,000 of property;
  • $50,000 of payroll;
  • $500,000 of taxable gross receipts;
  • 25% of total property, total payroll, or total gross receipts; or
  • Is domiciled in Ohio.
• See Information Release 2005-02 (link to ODT website).
• See Crutchfield Corp. v. Testa, 151 Ohio St.3d 278, 2016-Ohio-7760.

Who is subject to the CAT?

• A “person” is subject to the CAT. “Person” includes: individuals, combinations of individuals of any form, receivers, assignees, trustees in bankruptcy, firms, companies, joint-stock companies, business trusts, estates, partnerships, limited liability partnerships, limited liability companies, associations, joint ventures, clubs, societies, for-profit corporations, S corporations, qualified subchapter S subsidiaries, qualified subchapter S trusts, trusts, entities that are disregarded for federal income tax purposes, and any other entities.
• An “excluded person” is not subject to the CAT. The following are “excluded persons”:
  • A person with less than $150,000 in taxable gross receipts;
  • Public utility paying the public utility excise tax;
  • Financial institution (FI) paying the financial institutions tax (FIT);
  • Persons owned by FI paying the FIT;
  • Insurance company paying Ohio premiums tax;
  • Person that solely facilitates or services one or more securitizations of phase-in-recovery property pursuant to a final financing order;
  • Pre-income tax trust and any pass-through entity owned by such trust;
  • Non-profit organizations.
• Beginning 1/1/2024, a person with less than $3M in taxable gross receipts is not required to file. Beginning 1/1/2025, a person with less than $6M in taxable gross receipts is not required to file.

• The CAT is levied on each person with “taxable gross receipts” for the privilege of doing business in Ohio. The base of the CAT is taxable gross receipts, which are those gross receipts sitused (see question 6 below) to Ohio.
• “Gross receipts” is defined as:
  • the total amount realized by a person;
  • without deduction for the cost of goods sold or other expenses incurred;
  • that contributes to the production of gross income of the person;
  • including the fair market value of any property and any services received; and
  • any debt transferred or forgiven as consideration.

The CAT is designed to include in the base taxable gross receipts from each sale, which can lead to a pyramiding of the tax. Pyramiding is one of the disadvantages of a gross receipts tax. Keep in mind that there may be an exclusion (i.e., inter-member receipts of a consolidated elected taxpayer group, the agency exclusion, etc.) that applies to a specific sale (or portion of a sale) in the distribution channel.

Gross receipts are “sitused” to Ohio as follows (see Ohio Revised Code 5751.033):

• Rents/royalties from real property located in Ohio shall be sitused to Ohio;
• Rents/royalties from tangible personal property (TPP) located or used in Ohio;
• Electricity – the sale of electricity and electric transmission and distribution services shall be sitused to Ohio in the manner provided under Revised Code 5733.059;
• Sale of real property located in Ohio shall be sitused to Ohio
• Sale of TPP is sitused to Ohio if the property is received in this state by the purchaser.
  • In the case of delivery of tangible personal property by motor carrier or by other means of transportation, the place at which such property is ultimately received after all transportation has been completed shall be considered the place where the purchaser receives the property. For purposes of this section, the phrase “delivery of tangible personal property by motor carrier or by other means of transportation” includes the situation in which a purchaser accepts the property in this state and then transports the property directly or by other means to a location outside this state.
• Trademarks, trade names, intellectual property are sitused to Ohio to the extent that the receipts are based on the amount of use of the property in this state. If the receipts are not based on the amount of use of the property, but rather on the right to use the property, and the payor has the right to use the property in this state, then the receipts from the sale, exchange, disposition, or other grant of the right to use such property shall be sitused to this state to the extent the receipts are based on the right to use the property in this state.
• Transportation services by a motor carrier are sitused to Ohio in proportion to the mileage traveled by the carrier during the tax period on roadways, waterways, airways, and railways in Ohio to the mileage traveled by the carrier during the tax period on roadways, waterways, airways, and railways everywhere.
• Services and other receipts not captured above are sitused to Ohio in the proportion that the purchaser’s benefit in Ohio with respect to what was purchased bears to the purchaser’s benefit everywhere with respect to what was purchased.
  • The physical location where the purchaser ultimately uses or receives the benefit of what was purchased shall be paramount in determining the proportion of the benefit in this state to the benefit everywhere.

Yes, Ohio Revised Code 5751.01(F)(2) provides the list of excluded gross receipts. Some of the more common exclusions include:

• Interest income except interest on credit sales;
• Dividends and distributions;
• Receipts from the sale, exchange, or other disposition of an asset described in section 1221 or 1231 of the Internal Revenue Code;
• Proceeds received attributable to the repayment, maturity, or redemption of the principal of a loan;
• Proceeds received on the account of payments from insurance policies, except those proceeds received for the loss of business revenue;
• Property, money, and other amounts received or acquired by an agent on behalf of another in excess of the agent’s commission, fee, or other remuneration;
• Cash discounts, returns & allowances, bad debts.
• For a full list of the statutory exclusions, please click here

• Separate filer – if a person does not have a common owner, then the person is required to file as a separate filer.
• Combined taxpayer – if a person has a common owner then, the person along with the common owner and any other person the common owner owns more than 50% are required to file as a combined taxpayer.
• Consolidated elected taxpayer (CET) – a group of commonly-owned persons can elect to be treated as a CET and file one return as a CET. The group must make an election to include all persons owned at least 50% or at least 80% in the group. The group must also elect to include or exclude all foreign persons in the CET group.

• Person that owns “or” controls certain percentage of the value of the ownership interest (statute).
• Person that owns “and” controls certain percentage of the value of the ownership interest (rule).
• Combined – more than 50%.
• Consolidated elected.
  • At least 50%, or at least 80% (taxpayer election).
  • Include foreign entities (taxpayer election).
• According to the Ohio Department of Taxation, Internal Revenue Code attribution rules do not apply.

Combined – more than 50%.

• Only those entities with substantial nexus are required to be part of the combined taxpayer group.
• Taxable gross receipts between members of a combined taxpayer group are subject to CAT.

Consolidated elected

• At least 50%, or at least 80% (taxpayer election).
• Include foreign entities (taxpayer election).
• All persons meeting the elections above are required to be part of the consolidated elected taxpayer group even if a person does not have substantial nexus.
• Receipts between members of the consolidated elected taxpayer group are not subject to CAT.

Periods prior to 1/1/2024.

• Annual – taxpayers with less than $1M in taxable gross receipts in a calendar year were required to file annually.
• Quarterly – taxpayers with more than $1M in taxable gross receipts in a calendar year were required to file quarterly.

Periods after 1/1/2024.

• All taxpayers are required to file quarterly.

For periods prior to 1/1/2024 – Yes, there is an annual minimum tax that is based on a taxpayer’s previous calendar year taxable gross receipts.

For periods beginning 1/1/2024 – No, the annual minimum tax has been eliminated.

Combined – more than 50%.

• Required to file as a group return unless a person requests permission to opt out of the combined group filing.
• A person opting out of the combined group filing files as a separate filer, but is not entitled to the $1M exclusion (for periods prior to 1/1/2024), the $3M exclusion (for periods after 1/1/2024 and before 1/1/2025), or the $6M exclusion (for periods beginning 1/1/2025). Further, the opted-out person is not required to pay the annual minimum tax for periods prior to 1/1/2024.

Consolidated elected.

• There is no option to request to opt out of the consolidated elected taxpayer group filing.

• Yes, according to the CAT Voluntary Disclosure Unit, if you haven’t registered and filed, a taxpayer can request to participate in a voluntary disclosure, which limits the periods to be filed to only 3 years and waives penalties.
  • Taxpayers may be able to obtain a retroactive consolidated taxpayer election as part of a voluntary disclosure.
• According to the CAT Voluntary Disclosure Unit, taxpayers that are already registered or have been contacted for audit are not eligible for the voluntary disclosure program. Taxpayers may wish to consider approaching the Department of Taxation outside of the voluntary disclosure program if ineligible for the voluntary disclosure program.
• Please contact us to discuss assistance with obtaining a voluntary disclosure or contacting the Department outside of the voluntary disclosure program.

You should take the audit commencement letter seriously because the Department could issue estimated assessments if you don’t cooperate with the audit. You should consider reaching out to outside counsel with the experience necessary to handle the audit. ZHF has substantial CAT experience and stands ready to assist you with your audit.

• If you have overpaid the CAT, taxpayers can file a CAT-REF (along with amending the returns appropriate period(s)). ZHF has substantial CAT experience and stands ready to assist you with your refund claim.
• Refund claims can be filed up to four (4) years from the date of payment of the CAT.

Assessment

• If return has been filed: 4 years from the later of the due date or filed date.
• If no return filed: 10 years from the due date – Audit Division usually audits for 7 years for unregistered companies.

Refund

• 4 years from the date of payment.

A sales tax is a tax imposed on a sale, transfer, or exchange of a taxable good or service. It is calculated as a percentage of the sale price of the goods or services changing hands in the transaction. In most states, the sales tax is collected by a vendor and paid to the government on behalf of the customer as the customer is ultimately responsible for the tax. However, in some states the tax is levied on the vendor and the vendor may pass the sales tax through to the customer.

A sellers use tax is typically the same as a sales tax, except the tax is imposed on a vendor located outside the state where the sale occurs. The out-of-state vendor must collect the sellers use tax because the vendor has a filing requirement in the state where the sale occurs.

Yes, in almost all states, the tax is required to be separately stated by the vendor to show that tax was paid on the transaction.

In general, a consumers use tax is a tax imposed on the storage, use, or consumption of a taxable good or service where no sales tax was paid to the vendor on the sale of that good or service. States impose a use tax as a complement to their sales tax to ensure such transactions do not escape taxation. Other than the party that must pay the tax to the government, the rules for a use tax are generally the same as those for a sales tax in the same state.

Forty-five states and the District of Columbia impose a sales and use tax. The five states that do not impose sales/use tax can be remembered by the acronym, ‘NOMAD,’ standing for: New Hampshire, Oregon, Montana, Alaska, and Delaware.

Some states like Colorado, Illinois, Louisiana, and Alabama allow local jurisdictions to have their own sales tax (home-rule) that is reported on a return separately from the state sales tax. Some states, like Ohio, allow local jurisdictions to have a sales tax and the tax is reported on one return filed at the state level.

Credit for tax paid to other jurisdictions varies by state. Some states will give full credit for tax paid to other jurisdictions. Others may only give credit for the state portion of the tax, while giving no credit for any local or county taxes paid. States usually will not give credit for tax if the tax was improperly paid and could be refunded.

• “Nexus” is a concept meaning a business has a sufficient connection to a jurisdiction for that jurisdiction to impose a tax, or an obligation to collect tax, on the business. In the sales tax context, if a business has nexus with a state, the state may impose an obligation on that business to collect sales/sellers use tax on its transactions with customers. In the use tax context, if a business has nexus with a state, the state may impose the use tax directly on that business if it has made a taxable use of an item for which it has not paid a sales tax.
• Nexus for sales tax purposes is different than nexus for income tax purposes. In the income tax context, businesses have the protection offered by Public Law (“P.L.”) 86-272, which prevents a state from imposing a tax on a business that only solicits sales in that state and ships its good to that state by common carrier. P.L. 86-272 does not apply to sales and use taxes, however. Prior to the decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), a business had to have physical presence in a state to establish sales or use tax nexus. In Wayfair, the U.S. Supreme Court held that physical presence was no longer necessary and substantial nexus could be established using bright line standards based on the amount of sales by dollar amount or number of transactions (in the S. Dakota law reviewed in Wayfair, that was $100,000 or 200 transactions, respectively). All states with a sales tax have since followed South Dakota in enacting bright line standards and such standards vary by state.
• ZHF professionals have assisted clients with determining where and when nexus has been created along with the potential liability associated with such determinations. ZHF assists clients in navigating voluntary disclosures to address the potential liability under more favorable terms than an audit. To find out more about our voluntary disclosure services, please visit our voluntary disclosure page (add link here).

If you purchased a taxable item but did not pay tax to the vendor on that purchase, you have a requirement to pay use tax if you are not an exempt entity. For example, if you purchased an item in one state and the item was delivered to you for use in another state, the vendor may not have charged sales tax. You are required to pay use tax on the purchase price of that item to the state of delivery and use.

Sales and use taxes are generally imposed on the retail sale of tangible personal property, meaning physical goods. They may also be imposed on some intangible personal property, such as computer software and electronic goods such as streaming audio or video products.
States may tax certain enumerated services as well, while a few states reverse that approach by taxing all services except for certain enumerated exceptions. Goods or services sold for resale are typically exempt from sales and use tax.

The tax base for sales or use tax varies by state, as each state has its own laws imposing the tax. The starting point is generally the price paid for a good or service. Additional items such as shipping, handling charges, or installation may be subject to tax depending on the laws of the state.

State sales and use tax rates vary by jurisdiction. State rates range between 4% and 7.25% in 2024. However, many states allow political subdivisions such as cities or counties to impose their own rate on top of the state rate. What the purchaser pays is a combination of the state rate plus the local rate. Typically, sales tax rates are the same as the use tax rates.

Sales and use tax returns are typically filed monthly. However, states often allow less frequent filing, such as quarterly, semi-annually, or annually for purchasers or vendors with relatively small liabilities. Many states will require registered vendors to file periodic returns even if their liability for a period is zero. It is important to be aware of the requirements in any states in which you operate, so as not to miss a required filing.

Many states utilize the same return for both sales and use tax. Some states, such as Ohio, have separate accounts and returns for sales/sellers use tax and consumers use tax.

Some states provide taxpayers with the ability to apply for and receive a direct payment authority, which typically allows the taxpayer to issue its direct payment authority to vendors and not pay sales tax to the vendor. The direct payment authority holder then remits tax directly to the state on any taxable transactions.

Some benefits of a direct payment authority include:

• Not relying on your vendor to collect the correct amount of tax;
• Allowing permit holder to remit tax based on the use of the item purchased at the time of use, which use may not be known at the time of sale;
• Taking control of sales and use tax compliance.

Some disadvantages of a direct payment authority include:

• Taking on complete responsibility for sales and use tax compliance for purchases, which can be costly and time-consuming;
• Subjecting taxpayer to more stringent scrutiny by taxing jurisdictions.

All states have exemptions or exclusions from what is subject to tax. Most states have an exemption for sales for resale, and many have exemptions for equipment purchased for use in manufacturing. There is considerable variety in this area, so businesses must check the law to understand what purchases are exempt. Although it is typically a seller’s responsibility to collect sales tax, a purchaser may be audited and be found liable for unpaid tax. Also, a seller may not always know that a purchased item will be used for an exempt purpose, such as manufacturing. For these reasons, it is wise not to rely on the seller but to become familiar with the law.

ZHF professionals have assisted clients with determining whether exemptions apply to purchases to ensure the correct taxability or obtain refunds if tax has been overpaid because an exemption was not properly taken.

Yes, it is required to support not collecting tax on a sale in most states and a best practice in all states. If a customer claims an exemption, you should always collect an exemption/resale certificate. If your business is audited and it is found you did not collect tax on various sales, an exemption/resale certificate from the customer can protect the vendor from being assessed for uncollected tax in most states. Without an exemption/resale certificate, a vendor may be found liable for the tax the vendor didn’t collect. You will want to make sure you obtain the correct certificate and that it contains all the information necessary to substantiate the exemption.

Yes, in most states. Many states have a voluntary disclosure program or something similar in which a taxpayer can come forward and remit tax owed from previous filed or unfiled periods for sales and use tax. These programs often reduce the look back period, reduce the penalties imposed, in some situations even reduce interest, and help avoid an unplanned audit.

Depending on your timing, you may be able to take advantage of an amnesty program offered by certain states on a periodic basis. Be careful to compare whether the amnesty program’s benefits are better than the voluntary disclosure program’s benefits offered by the state.

ZHF assists clients in navigating voluntary disclosures for sales/sellers use tax and consumers use tax across the country. ZHF can also approach a taxing jurisdiction to negotiate a settlement if a voluntary disclosure or amnesty program is not available. To find out more about our voluntary disclosure services, please visit our voluntary disclosure page.

The first thing you want to do is to respond to the auditor. Ignoring an audit notice can lead to estimated liabilities far greater than what may be owed. Confirm the entity being audited and the audit period so there is no confusion. Get clarification on what information is initially requested and any upcoming due dates. Only provide the information requested.

ZHF professionals have extensive experience with defending clients in sales/seller’s use and/or consumers use tax audits. ZHF professionals are also familiar with conducting participatory/managed audits to obtain the additional benefits offered by those types of audits. To find out more about our audit defense services, please visit our audit defense page.

If sales or use tax is overpaid, an application for refund can be filed (with the state in which the tax was overpaid or the vendor depending on the taxing jurisdiction) . Along with the application for a refund, any supporting documentation would also be required, such as invoices, proof of payment, and applicable reason(s) for the refund. Each state may vary as far as how much backup documentation is needed to substantiate the refund. Unless advised by a taxing jurisdiction, a taxpayer should not withhold the overpaid amount on a sales or use tax return to compensate for the overpaid amount.

Yes, there are several different software available to assist with collecting sales tax. It is important to research which software would be best suited for your business industry and in which states the software can be utilized.

Some of the more popular sales tax software include Vertex, Avalara, and TaxJar.
Additionally, depending on which states you are required to collect sales tax, you may be able to use a Certified Service Provider (CSP) as part of the Streamlined Sales Tax Project. Click the link here to see if a CSP would work for you.

Sourcing for sales tax rates can vary from state to state and can depend on the type of purchase. Some states may utilize origin-based sourcing, meaning that the sales tax rate is determined by where the purchase order is received. Other states are destination sourced, in which the sales tax rates are based upon where the property is received. Sourcing of sales tax rates can also depend upon the type of sale, whether it be tangible personal property, a rental or lease, or a service.

The service should be sourced to the destination to which it is used or provided. In the case of software as a service (SaaS), many states offer a Multiple Points of Use (MPU) exemption. If a purchase is used in multiple states, the tax should be applied by the percentage of users in each state. It is important to note that if an MPU exemption is taken, the proper percentage of tax should be properly applied to each state (if applicable).

ZHF professionals have extensive experience in addressing MPU issues for our clients and have been successful in identifying and obtaining refunds of overpaid tax because of MPU. To find out more about our refund review services, please visit our refund review page.

The statutes of limitations for both audits and refunds vary by state. For audits, it often depends on if the taxpayer is already registered for the tax. If the taxpayer has filed returns, then the normal statute of limitations is applicable (in general, usually three to four years but varies by state). If returns have not been filed, the taxpayer will generally have a longer statute and in some states, there is no statute of limitations. The statutes of limitations for refunds vary by state as well, with many states applying a three to four-year statute.

Most states exempt sales to certain types of nonprofit organizations. The types of nonprofit organizations that qualify for exemption in many states are charitable, religious, and educational organizations. However, some states provide a broader exemption that includes civic, veterans, and fraternal organizations. Some states are more specific in detailing the organizations that qualify for exemption. Because the states’ exemption provisions differ, it is important to research the treatment of nonprofit organizations in the specific state.

It depends on the specific laws of each state. Some states may require nonprofit organizations to collect sales tax on all taxable transactions with no restrictions. Most states that provide some exemption for sales by nonprofit organizations limit the exemption to certain types of nonprofit organizations, e.g., charitable, religious, and educational organizations. Some might have special guidelines, such as if a nonprofit only sells taxable goods for a limited number of days per year. It may depend on what the purpose of the sale is, for instance fundraising versus other business needs. It is important to research the treatment of sales by nonprofit organizations for each state.

The definition of real property varies from state to state. In general, real property means land, buildings, structures, and certain fixtures that are permanently affixed. Real property includes items that are common to all buildings. Real property is generally not subject to sales tax for the consumer, but real property materials are generally taxable to the contractor that purchases the materials. Keep in mind that certain states make a distinction between property incorporated into realty that benefits the realty and property that benefits the business operating on the real property. In some states, property that benefits the business is considered tangible personal property even if incorporated into the real property.

It depends on what type of work the contractor performs. In general, contractors are not required to collect sales tax on the repairs or installation of real property. The contractor is usually responsible for paying sales tax on purchases of materials that the contractor incorporates into the real property, if the job is taxable.

If the contractor is selling tangible personal property, or installing a taxable fixture, the contractor would be required to collect and remit sales tax from the consumer or obtain an exemption certificate if applicable.

Tax planning is the process of evaluating tax consequences of business or financial decisions and adjusting those decisions to minimize related tax liability. It can take many forms. Tax planning can mean optimizing the tax outcomes of large company-changing transactions, or it can mean evaluating the everyday operations of a business to identify opportunities for tax savings. In either case, it means minimizing overall tax liability (federal, state, and local) while also balancing this goal with other business and financial objectives and maintaining compliance with tax laws. Businesses of all sizes, nonprofits, individuals, trusts, and estates can all benefit from effective tax planning.

Tax advisors should be involved at the early stages of all major transactions to identify the tax consequences and to find opportunities to modify the transaction in ways that will reduce or defer tax liability. Companies should also regularly review their everyday operations to identify opportunities for greater tax efficiency. A regular review of tax planning opportunities can help businesses maximize deductions and tax credits, establish tax-efficient employee and officer compensation strategies, and reduce overall taxable income or tax liability.

Preparation for an IRS audit begins long before receiving an unwelcome letter from the IRS. Especially when entering into a transaction that will be large, significant, and/or atypical for the taxpayer, at a minimum, planning for a tax audit should begin no later than the time the tax return is being prepared. However, in many cases, it will be advisable to engage outside tax counsel even earlier—prior to entering a significant transaction or before commencing a major project. Transactions with large tax effects or projects designed to benefit from tax incentives often require proactive compliance efforts to ensure that proper documentation is created and maintained to defend the taxpayer in the event of an audit. In order to make sure that any complicated legal (or technical) issues are identified and reviewed, and that related documentation is understood and gathered, it is a best practice to think ahead to how a large or complicated tax item will be defended if audited by the IRS. It is significantly more efficient to contemplate issues ahead of time rather than having to begin considering a complicated or fact-intensive issue when it is audited.

In more common matters, our advice is that it is probably more efficient for the taxpayer or CPA to handle the initial response to the IRS and then, if the initial correspondence does not resolve the matter (and if the potential liability is significant), to consult with a tax attorney.

Taxpayers who disagree with an IRS assessment have several options. In selecting a course of action, it is important to consider the time and expense necessary to pursue these options, as well as the likelihood of success. Also, it is essential to closely monitor all deadlines for disputing the assessment so as not to inadvertently waive opportunities for review.

IRS Independent Office of Appeals: After completing an audit, the IRS will issue a Notice of Proposed Adjustment (Form 5701) to the taxpayer, also known as a 30-day letter. This notice will describe the issues and the proposed adjustments to tax liability. A taxpayer has 30 days from the date of the Notice of Proposed Adjustment to file a written protest with the IRS Independent Office of Appeals (“Appeals”), a separate office within the IRS that is independent of the Exam and Collections offices. Appeals officers are permitted to consider the hazards of litigation in resolving a case, which may allow taxpayers to obtain a favorable settlement.

Offer in Compromise or Installment Agreement: Taxpayers should also consider applying for an Offer in Compromise or setting up an installment agreement with the IRS. These can be established without the involvement of Appeals, but an Offer in Compromise or an installment agreement will, in many cases, only be favorable (or available) if there is uncertainty about the taxpayer’s ability to pay the asserted deficiency.

Voluntary Mediation: Taxpayers may also have the option to participate in the IRS’s voluntary Fast Track mediation program or other alternative dispute resolution mechanisms, which may facilitate a faster and less costly resolution than a traditional appeal. An independent mediator from Appeals will facilitate settlement discussions and may suggest proposals for settlement. Because the mediation program is voluntary, both the taxpayer and the IRS have the ability to walk away from the negotiating table and pursue the traditional avenues of dispute resolution.

Tax Court and Other Judicial Review: If a taxpayer does not respond to a Notice of Proposed Adjustment, the IRS will issue a Statutory Notice of Deficiency (a 90-day letter). At this stage, the taxpayer may choose to file a petition in the U.S. Tax Court to dispute the assessment without the need to pay the deficiency while the case is pending. Taxpayers may instead choose to pay the deficiency and file a refund claim in federal district court of the Court of Federal Claims. Tax Court cases that have not yet been reviewed by Appeals at the time the petition is filed will be referred to Appeals, which may also afford the taxpayer an additional chance for settlement outside of court.

If no settlement can be reached, the Tax Court or other federal court will resolve the case after discovery and trial. Both the taxpayer and the IRS may appeal, as of right, to a federal court of appeals and may seek discretionary review of the appellate decision by the U.S. Supreme Court. In certain cases where less than $50,000 per tax year is in dispute, taxpayers may choose the Tax Court’s “Small Tax Case” or “S Case” procedure, which is generally less formal and expensive, but does not offer an opportunity for further judicial appeals.

Taxpayers generally should attempt to avoid resolving their disputes in court unless the assessment is sufficiently large to justify the often-significant expenses of litigation. By working closely with legal counsel to evaluate the strengths and weaknesses of their case and to analyze all available options for settlement, a taxpayer may be able to avoid litigation and achieve an efficient resolution of their dispute outside of court.

No. In most situations involving tax liabilities of under $100,000 (and where the taxpayer has not been contacted by a Revenue Officer), it is just as efficient for a taxpayer to call the IRS (or use its new online capabilities) to try to establish an installment agreement. If the taxpayer is comfortable with the monthly payment amount proposed by the IRS, then hiring a tax attorney probably will not be efficient. On the other hand, if there is a very large tax liability and/or the IRS proposes a monthly payment amount higher than the taxpayer believes they can afford, then a tax attorney may be able to assist.

Taxpayers have 90 days after the date of an IRS Notice of Deficiency to file a petition in U.S. Tax Court. Before litigating in Tax Court, it is important to consider other avenues for resolving tax disputes, which may be far less costly. Review by the IRS Independent Office of Appeals, which can result in favorable settlements to taxpayers, may be a cheaper, faster option than Tax Court. Taxpayers should also consider whether to pursue an installment plan or Offer in Compromise.

It is essential to evaluate the hazards of litigation before attempting to resolve a dispute in Tax Court. Complex cases can result in significant legal expenses, and it is never possible to guarantee a favorable judicial outcome.

However, in many cases, Tax Court litigation is an important tool for resolving major tax disputes. When a significant amount of tax, interest, and/or penalties are at issue and a taxpayer has strong legal and evidentiary support for its position, a Tax Court petition may be the best option. The Tax Court can often deliver favorable decisions that the IRS would not offer through its internal channels for review and settlement. In addition, Tax Court proceedings may, in some cases, induce the IRS to offer a more favorable settlement.

The IRS may place a lien on property to give other potential creditors notice of an outstanding tax debt or may issue a levy to seize assets in order to collect unpaid taxes.

Taxpayers who receive a Notice of Federal Tax Lien or Notice of (Intent to) Levy generally have 30 days from the date of the notice to request a Collection Due Process (CDP) hearing by filing Form 12153. By making this request, the taxpayer is entitled to a hearing before the IRS Independent Office of Appeals, and the IRS is generally required to stop all collection actions while the appeal is pending. Taxpayers should also consider whether to challenge the lien or levy itself, in addition to the underlying tax liability. For example, if the IRS has not provided the notice required by law, failed to act within the applicable statute of limitations, or even issued the notice to the wrong taxpayer, the notice may be invalid. At the CDP hearing, taxpayers may dispute the tax liability (to the extent the taxpayer has not already had an opportunity to do so), dispute the validity of the enforcement action, and discuss alternative enforcement options, such as an installment agreement or Offer in Compromise. The outcome of the CDP hearing is appealable to Tax Court.

Taxpayers who miss the deadline for requesting a CDP hearing may still request an “equivalent hearing” within one year of the date of the levy notice or within one year of the five-business-day period following the filing of a notice of federal tax lien. However, an “equivalent hearing” is not equivalent to a CDP hearing in important ways. The IRS may continue collection actions while an equivalent hearing is pending, and the outcome of the equivalent hearing is not appealable in Tax Court.

The ideal way to avoid tax penalties is to comply with all payment and filing obligations. However, in reality, taxpayers are often tasked with applying complex and unclear legal requirements, and even the most diligent and conservative of taxpayers may have tax deficiencies.

To prevent or reduce costly penalties, taxpayers should consult independent legal counsel or other tax experts before entering large or complex transactions that may have significant tax consequences. By hiring an independent advisor with the relevant expertise, providing the advisor with complete and accurate information about the planned transaction, and the advice received, taxpayers can often avoid penalties.

However, taxpayers should be aware that advice provided by a “promoter” of a transaction designed to produce tax benefits does not provide penalty protection. To avoid incurring penalties, taxpayers need to consult independent advisors and to follow their advice in good faith.

Further, merely having a tax return prepared by an accountant is not sufficient to avoid penalties. Preparing a return is not equivalent to giving tax advice.
In addition, taxpayers should closely monitor basic compliance requirements, such as information reporting deadlines and other mandatory disclosures, in order to avoid penalties from the failure to file a return or other tax report. Businesses should establish internal controls to ensure that regular filing deadlines are met and should consult with outside experts as needed in order to identify any additional disclosure requirements that may be triggered by transactions outside the ordinary course of business.

Finally, for taxpayers who discover that they have underpaid federal taxes but who have not yet received a communication from the IRS, it may be possible to take advantage of Voluntary Disclosure Programs. The IRS has established various Voluntary Disclosure Programs to allow taxpayers to self-report underpaid taxes. These programs generally reduce the risk of penalties and may even offer the opportunity for reductions in the amount of tax owed in certain cases.

Taxpayers should always maintain records for at least three years after they file their tax return or after the due date of their return (whichever is later). Certain records may affect tax liability for multiple years and should be maintained until at least three years after the filing date or due date of the tax return for the latest year that might be implicated. However, in many circumstances, taxpayers are legally obligated to maintain records for longer periods. And even if no legal rule requires it, best practices for resolving future tax disputes will demand a longer retention period in some cases.

For example, taxpayers who claim a loss from bad debts or worthless securities are required to keep related records for 7 years. Employers must maintain records related to payroll taxes, wages, and other compensation for at least 4 years. Taxpayers who claim depreciation or amortization deductions need to keep related records for the entire useful life of the assets that generate the deductions, plus at least three years.

Taxpayers who enter major transactions that affect the structure of a company, such as mergers and acquisitions, should also maintain related records long after the normal three-year period, especially if any parties to the acquisition had significant tax attributes (e.g., net operating losses, tax credit carryforwards, etc.) that will be used over multiple years. Similarly, taxpayers undertaking large projects designed to benefit from long-term tax incentives, such as projects that qualify for tax credits under the Inflation Reduction Act of 2022, should maintain records from the beginning of the project until at least three years after the return is due and filed for the latest tax year in which the corresponding tax credit will be claimed.

Tax recordkeeping requirements may be daunting, but diligent and proactive document retention practices can greatly reduce the time and expense required to address future tax audits. It can also help avoid costly litigation. Taxpayers should work closely with their advisors to ensure that relevant documentation is created and maintained for all significant transactions.

No. While accountants and tax preparers are generally required to keep client information confidential, they are not subject to the same privilege rules that apply to attorneys. Under attorney-client privilege, in most circumstances, an attorney cannot be compelled to disclosure communications with the client that occur in connection with legal representation. This privilege generally allows clients to have open and honest conversations with their attorneys without fear that the communications will be disclosed to the IRS or other government officials. (Of course, this assumes that the client does not waive the privilege by, for example, disclosing the contents of the attorney-client communication to a third party.)

While accountants and tax preparers are subject to ethical standards and statutory requirements related to the confidentiality of taxpayer information, these protections are less strong than attorney-client privilege. Communications between a client and an accountant or tax preparer may be subject to discovery in litigation, subpoena, or other mandatory disclosure. Thus, taxpayers who are concerned about the potential for a tax dispute should strongly consider engaging legal counsel in order to benefit from a thorough tax analysis conducted subject to attorney-client privilege.

Sometimes, yes. In some cases, IRS tax debt can be settled for a small fraction of what is owed. However, the circumstances under which the IRS will accept such an offer are narrow and always fact specific. The starting point is that, unless there are “exceptional circumstances,” the IRS only accepts offers in compromise if the taxpayer’s assets and cash flow would not enable the taxpayer to fully pay the tax debt within the time that the IRS has to collect. There are also situations where an offer in compromise should not be filed and other alternatives (such as “currently not collectible” status or a “partial pay installment agreement”) should be considered. In order to determine alternatives for resolving a tax debt, it is necessary to consider all aspects of a taxpayer’s liability, as well as the taxpayer’s complete financial picture, including assets, income, expenses, and unusual life circumstances. By making a thorough assessment, a taxpayer can make an informed decision about realistic alternatives for what resolution to seek from the IRS.

One helpful tool is the IRS Offer in Compromise pre-qualifier, which can serve as a starting point for taxpayers in determining an appropriate offer amount. Although the tool may indicate that a taxpayer can fully pay an outstanding liability, it may still be possible to reach a compromise agreement with the IRS based on the taxpayer’s unique circumstances. However, use of the tool does not necessarily guarantee that an offer will be accepted.

Ohio has two pass-through entity income taxes and three alternative PTE tax returns.

The first Ohio PTE income tax is, generally, an enforcement mechanism to enforce the collection of the Ohio personal income tax owed by non-resident owners of PTEs earning income from Ohio sources. The tax return used to withhold the personal income tax for these non-resident owners is IT-1140. A pass-through entity may instead choose to file IT-4708, the Composite Return, for those non-resident owners who choose not to file an Ohio individual income tax return for the tax year. The IT-4708 removes the requirement of such non-resident owners to file an individual Ohio return. It also allows the PTE to claim tax credits.

The second PTE income tax is the elective PTE tax, filed on form IT-4738, which is a mechanism to allow the $10,000 limitation on the itemized deduction for state and local taxes to be avoided by paying state income tax at the entity level. This is often referred to as a “SALT cap workaround.” Unlike the tax paid on either form IT-1140 or IT-4708, in which the PTE pays tax on behalf of the individual owners, the tax paid with IT-4738 is imposed on the electing PTE itself, at the entity level. Because Ohio tax is paid at the entity level, the individual owner, for federal tax purposes, receives after-tax income, thereby reducing the individual’s federal taxable income without the need for an itemized deduction.

For businesses with multistate operations, it’s important to be aware that other states may impose similar filing requirements on PTEs, and may have similar SALT cap workarounds using an elective tax. However, there are also differences in the specifics of each state’s tax. ZHF professionals can assist with decisions regarding what elections to make and which forms to file in Ohio and the other states in which you do business.

Yes. No matter which type of PTE tax return the PTE filed (IT-1140, -4708, or -4738), the owner can file an Ohio personal income tax return (IT-1040) and calculate his or her tax due, which might be lower than the amount paid by the PTE. In this case, the owner could get a refund.

Under Internal Revenue Code section 164(b)(6), which was added under the Tax Cuts and Jobs Act, the federal deduction of specific state and local taxes (including income taxes) is generally limited to $10,000 per tax year for any tax year beginning after December 31, 2017 and before January 1, 2026.

On November 9, 2020, the IRS issued Notice 2020-75, 2020-49 IRB 1.  This Notice informed taxpayers that proposed regulations would clarify that state and local income taxes imposed directly on and paid by a partnership or S corporation (a PTE) on its income are allowed as a deduction by the PTE in computing its non-separately stated taxable income or loss for the year of the payment — meaning that those payments are not taken into account in applying the SALT cap to any partner or shareholder in the PTE. The effect is to allow the owners of the PTE to work around the $10,000 limitation since their income is reduced by their share of the tax paid, without the need to take an itemized deduction. A “Salt cap workaround” statute is one that seeks to take advantage of IRS Notice 2020-75.

States have enacted statutes seeking to comply with the IRS theory explained in

IRS Notice 2020-75. However, taxpayers should be cautious since the IRS could ultimately conclude that a particular state’s “SALT cap workaround” statute does not operate correctly and could seek to deny the operation of that state’s statute in determining the income of the PTE or its owners. It is also unknown whether Internal Revenue Code section 164(b)(6), containing the SALT cap, will be renewed by Congress for tax years beginning after December 31, 2025.

The IT-4738 does not allow the PTE to claim business credits such as credits received from other PTEs or those awarded by the Ohio Department of Development. Electing into the IT-4738 filing does not foreclose these credits, but they must be taken on the taxpayer’s personal income tax return. A taxpayer may prefer to be included on Form IT-4708, the composite return, on which the PTE may claim these credits, thus simplifying the taxpayer’s Ohio compliance.

Ohio has enacted an elective tax that permits the federal benefit to be obtained by paying tax at the entity level to Ohio. Because the state income tax is paid by the entity, the owner’s federal adjusted gross income is reduced without the need to take an itemized deduction for SALT. The owner is able to receive a credit on his or her Ohio personal income tax return for his or her share of the taxes paid by the entity.

36 states and New York City all have taxes that function as SALT cap workarounds similar to Ohio’s. Although all these taxes have been made elective as of the 2024 tax year, there are details that differ for each state’s tax. Planning may be necessary to ensure a taxpayer with investments in PTEs in multiple states makes the most beneficial elections.

The answer depends on whether the taxpayer is an Ohio resident and which of three types of PTE tax returns is filed. Residents must always file a personal income tax return (IT-1040) if they have taxable income in Ohio, including income from a PTE. Non-residents have to file a personal income tax return if their PTE files Form IT-1140. If the PTE files either of forms IT-4708 or IT-4738, the filing of IT-1040 is optional. The purpose of the IT-4708 is to simplify tax filing for out of state owners by including them on this return filed by the PTE. The IT-4738 has the purpose of circumventing the federal SALT cap, but also provides the convenience of making the IT-1040 filing optional. Before choosing not to file a personal income tax return in Ohio, a taxpayer should consider whether the filing of an IT-1040 would save him or her in taxes due to the state.

Similar considerations exist for other states that have income taxes and options or requirements for these taxes to be paid by a PTE.

No, but many states do. As of April 2024, nine states do not impose an owner-level income tax on PTE income, and those states would not have a pass-through entity tax either.

Thirty-six states and New York City also have an elective PTE tax, an entity-level tax intended as a workaround for the state and local tax deduction limitation (a.k.a. SALT cap).

PTEs still don’t pay federal income tax. However, states often require PTEs to pay one of two kinds of taxes.

The first is similar to a withholding tax on the income that passes through to out-of-state owners. This is meant to ensure that such owners do not avoid (inadvertently or otherwise) paying income tax to a state with which they may have few contacts. Depending on the state, the tax could technically be the responsibility of both the entity (to withhold) and the entity’s owner (to pay). But the incidence of the tax ultimately falls on the owner.

The second kind is an elective pass-through entity tax that many states have enacted as a workaround to the $10,000 state and local tax deduction limitation (SALT cap). In this case, the pass-through entity pays the tax on its own behalf. However, the individual owner(s) are able to take a credit on their individual income tax returns for their share of the tax paid by the entity.

It depends on the state, but the general difference is whether the tax is an enforcement mechanism/reporting mechanism or a tax that is structured to avoid the $10,000 limitation on state and local taxes as an itemized deduction for federal income tax purposes.

Economic Development incentives are financial tools and resources, such as grants and tax abatements, offered by governments to private businesses to promote development activities, such as business expansion, economic growth, and job creation/retention.

Statutory economic development incentives are codified in state/local legislation and granted by statute by meeting certain eligibility requirements. Negotiated economic development incentives are discretionary and subject to government approval. Negotiated economic development incentives are not always available and only awarded on a case-by-case basis.

Statutory incentives are economic benefits received by meeting certain threshold criteria and performing certain activity. For example, Kansas exempts certain business personal property from taxation. This exemption is codified in state statute and is based on the date of purchase and type of personal property purchased. Since no formal approval is required after confirming eligibility, this is considered a statutory economic development incentive.

Tax credits, cash grants, and tax abatements are a common example of a discretionary incentives. State and local jurisdictions that offer negotiated economic development incentives often prescribe minimum eligibility requirements, but meeting those requirements is no guarantee of receiving an award. These programs are often competitive in nature, with multiple projects competing against each other for an award from a predetermined pool of available funds.

There are five key factors that drive economic development incentives: They are (in no order): 1) local/regional business climate; 2) workforce availability; 3) market demand; 4) available incentives and financing tools; and 5) cost of doing business.

An Economic Impact Analysis is not always an eligibility requirement to secure negotiated economic development incentives, however, providing this analysis can strengthen the business case for why an economic development incentive package is necessary to secure the project. Economic Impact Analyses justify the project’s return on investment, build credibility for the company (and therefore the project), and provide negotiating leverage.

This requirement varies by jurisdiction. Each economic development incentive program prescribes their own regulations regarding eligibility. It is typical for these programs to include minimum capital investment and job creation requirements.

There are over 5,000 federal, state, and local economic development incentive programs available in the United States.

Each economic development incentive program has its own method of monetization. Some incentives result in above-the-line benefit (e.g. sales tax) and others result in below-the-line benefit (e.g. property tax). It is important for businesses to review and understand the implications when they are awarded an economic development incentive.

Yes. Tax credits are a type of economic development incentive that provides a dollar-for-dollar reduction in the amount of tax owed. A tax credit is awarded against a pre-determined (and typically performance-based) metric such as capital investment or job creation.

The federal Work Opportunity Tax Credit is a tax credit awarded against federal income tax liability for employers who hire “qualified employees” resulting in a dollar-for-dollar reduction in a company’s tax liability. Another example is the Research and Development tax credit for businesses investing in innovation.