We have received numerous inquiries concerning the
Department's policy and interpretation of recent legislative
changes in connection with the taxation of S corporation
income. This information release sets forth our answers to
those questions.
-
QUESTION:
WHAT IS AMENDED SUBSTITUTE SENATE BILL NO. 121, 116TH
GENERAL ASSEMBLY?
ANSWER:
This legislation amended, among other things, Ohio tax law
regarding the taxation of S corporations and their
shareholders (see Subchapter S, Chapter 1, Subtitle A of
the Internal Revenue Code). Effective October 17, 1985 the
legislation repealed the portion of Ohio
Revised Code ("ORC") section 5747.01(A) which had provided
an exclusion for "any amounts of income included in
[federal] adjusted gross income by reason of Subchapter S,
Chapter 1, Subtitle A of the Internal Revenue Code, 26
U.S.C. 1371."
The bill also enacted ORC section 5733.09(B) which exempts
S corporations from the ORC Chapter 5733 corporation
franchise tax.1
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QUESTION:
WHAT IS THE EFFECTIVE DATE OF THE LEGISLATION?
ANSWER:
Section 3 of the legislation states that the corporate
franchise tax amendments are effective with the 1987
franchise tax year. Personal income tax law changes are
effective for taxable years ending after December 31, 1985.
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QUESTION:
WHAT IS THE PURPOSE OF THE LEGISLATION?
ANSWER:
The purpose of the law is to treat S corporations as nearly
as possible as partnerships for income and franchise tax
purposes so that income earned by an S corporation is taxed
only in the hands of the shareholders.
INCOME TAXATION OF S CORPORATION RESIDENT SHAREHOLDERS2
-
QUESTION:
DO THE APPORTIONMENT/ALLOCATION PROVISIONS SET FORTH IN ORC
SECTIONS 5733.05(B), 5733.O51, 5747.20, 5747.21, AND
5747.22 AFFECT THE TAX COMPUTATION FOR S CORPORATION
SHAREHOLDERS WHO ARE OHIO RESIDENTS?
ANSWER:
No. Since ORC Section 5733.09(B) exempts S corporations
from the franchise tax, it follows that the franchise tax
apportionment/allocation provisions (ORC sections
5733.05(B) and 5733.051) are not applicable. Furthermore,
under Chapter 5747 an individual's federal adjusted gross
income is the basis for calculating Ohio income tax. The
ORC section 5747.20, 5747.21, and 5747.22
apportionment/allocation provisions do not
affect the tax computation for residents; those provisions
apply only to nonresidents that claim the
Ohio nonresident tax credit. Thus, an Ohio resident's
entire distributive share from an S corporation is subject
to Ohio income taxation.
Even if an S corporation does business in several states or
even if an S corporation does no business in Ohio, 100% of
the Ohio resident's distributive share from the S
corporation is subject to Ohio individual income taxation.
In this manner, the tax treatment for Ohio resident
shareholders of S corporations parallels the Ohio tax
treatment for Ohio residents who have invested in
partnerships regardless of where the partnerships and S
corporations are located and regardless of the extent of
the multi-state activity of the partnerships and S
corporations. However, Ohio residents may claim the
resident credit set forth in ORC section 5747.05(B) for
income subjected to income tax in another state (see the
following question and answer).
-
QUESTION:
MAY AN OHIO RESIDENT SHAREHOLDER OF AN S CORPORATION CLAIM
THE ORC SECTION 5747.05(B) RESIDENT CREDIT IN THOSE
CIRCUMSTANCES WHERE THE S CORPORATION EITHER PAYS TO
ANOTHER STATE CORPORATE INCOME TAX OR PAYS TO ANOTHER STATE
CORPORATE FRANCHISE TAX BASED ON OR MEASURED BY NET INCOME?
ANSWER:3
Yes. An Ohio resident shareholder of an S corporation may
claim the resident credit for his/her distributive share of
S corporation income that is subjected to corporate income
tax or corporate franchise tax (based on or measured by net
income) by another state even if the S corporation itself
paid the tax.
In those situations where both the S corporation and the
shareholder pay taxes on or measured by income to a state,
the shareholder can claim the resident credit for both (i)
his/her distributive share of income upon which the
corporation paid the tax to another state and (ii) his/her
own income upon which he/she paid tax to another state.
The credit is based on the lesser of W the
shareholder's pro-rata share of the portion of income
actually subjected to an income tax in another state or
(ii) the shareholder's pro-rata share of the amount of
income tax liability paid to other states. In those
situations where the S corporation paid the tax, in order
for the resident shareholder to claim the credit, the
Department requires that the resident shareholder increase
his/her Ohio adjusted gross income by his/her proportionate
share of the tax paid by the S corporation.
Ohio residents cannot claim this credit for gross receipts
taxes or other similar excise taxes (states such as
Michigan and Indiana levy a gross receipts tax. Since those
taxes are not based on income, Ohio residents cannot claim
any credit for any such taxes which they, their businesses,
or their S corporations pay).
-
QUESTION:
DO THE VARIOUS BUSINESS CREDITS SET FORTH IN OHIO LAW PASS
THROUGH TO RESIDENT SHAREHOLDERS?
ANSWER:
Yes. S corporation business credits will pass through to
the resident shareholders. However, Q & A #32 discusses
a limitation with respect to the pass-through of certain
credit carryforwards. Unless Ohio law expressly states
otherwise, each shareholder's portion of the credits is
based on his/her distributive share of income as set forth
in Internal Revenue Code section 1366.
INCOME TAXATION OF S CORPORATION NONRESIDENT
SHAREHOLDERS
-
QUESTION:
ARE S CORPORATION NONRESIDENT SHAREHOLDERS SUBJECT TO THE
OHIO INDIVIDUAL INCOME TAX?
ANSWER:
Yes. For taxable years ending after December 31, 1985, any
nonresident individual or nonresident estate whose federal
taxable income includes a distributive share from an S
corporation is subject to the Ohio individual income tax
and must file if any of the following circumstances apply:
- The S corporation was incorporated in Ohio for any
portion of the period to which the distributive share
relates, or
- The S corporation owned or used a part or all of its
capital or property in Ohio for any portion of the period
to which the distributive share relates, or
- The S corporation did business in Ohio for any portion
of the period to which the distributive share relates, or
- The S corporation held a certificate of compliance for
any day within the period to which the distributive share
relates.
However, Federal Public Law 86-272 may protect some
nonresidents from the Ohio individual income tax if the S
corporation's Ohio activities do not exceed the activities
protected by Public Law 86-272.
-
QUESTION:
HOW DO S CORPORATION NONRESIDENT SHAREHOLDERS CALCULATE
THEIR OHIO TAX LIABILITY?
ANSWER:
Since the purpose of the legislation is to treat for income
tax purposes an S corporation as a partnership, nonresident
S shareholders must utilize ORC section 5747.22 and section
5747.05(A) to determine the amount of the nonresident
credit for income neither earned nor received in this
State.
Those two sections in conjunction with ORC sections 5747.01
and 5747.02 result in a nonresident's out-of-state income
being included in determining the marginal rate at which
the nonresident pays the tax. The Ohio Income Tax Return
(Ohio Form IT-1040) instructions discuss the calculation of
a nonresident credit. In addition, readers may wish to
refer to Hellerstein, "Some Reflections on the State
Taxation of a Nonresident's Personal Income", 72
Michigan Law
Review 1309, 1335 (1974).
The determination of whether an item is "business income"
or "nonbusiness income" is made at the S corporation level.
The Department's position is that all income is business
income unless the taxpayer establishes otherwise. This
presumption can be rebutted with a preponderance of the
evidence to the contrary.4
-
QUESTION:
DO THE VARIOUS BUSINESS CREDITS SET FORTH IN OHIO LAW PASS
THROUGH TO NONRESIDENT SHAREHOLDERS?
ANSWER:
Yes. S Corporation business credits will pass through to
the nonresident shareholders. However, Q & A #32
discusses a limitation with respect to the pass through of
certain credit carryforwards. Unless Ohio's law expressly
states otherwise, each shareholder's portion of the credits
is based on his/her distributive share of income as set
forth in Internal Revenue Code Section 1366.
-
QUESTION:
ASSUME AN S CORPORATION DOING BUSINESS IN OHIO HAS TWO OR
MORE NONRESIDENT SHAREHOLDERS WHO DERIVE NO TAXABLE INCOME
FROM OHIO OTHER THAN A DISTRIBUTIVE SHARE OF THE S
CORPORATION INCOME. MAY THE S CORPORATION FILE A SINGLE
RETURN ON BEHALF OF THE NONRESIDENT SHAREHOLDERS?
ANSWER:5
Yes. Each year an S corporation may file a master income
tax return, Ohio Form IT-1040M, on behalf of and as agent
for its electing nonresident shareholders having no
Ohio-sourced income other than their distributive share of
income from the S corporation.
CORPORATION FRANCHISE TAX - GENERAL
QUESTIONS
-
QUESTION:
FOR PURPOSES OF THE OHIO FRANCHISE TAX WHAT IS A "TAX
YEAR"?
ANSWER:
A tax year is the calendar year for which the franchise tax
is paid and for which the franchise tax report is due.
-
QUESTION:
FOR PURPOSES OF THE OHIO FRANCHISE TAX WHAT IS A "TAXABLE
YEAR"?
ANSWER:
The taxable year is the corporate franchise taxpayer's
fiscal or calendar year which ends prior to January 1 of
the tax year and on which the tax is based. For example, an
Ohio franchise taxpayer with a calendar (taxable) year end
of December 31 will file a 1995 franchise tax report based
upon the taxable year ended December 31, 1994. The
corporation pays the 1995 franchise tax for the privilege
of doing business in Ohio during the 1995 calendar (tax)
year.
An Ohio corporation with a fiscal (taxable) year end of
January 31 will file its 1995 franchise tax report based
upon the taxable year ending January 31, 1994. Filing of
the franchise report and paying the 1995 franchise tax are
for the privilege of doing business in Ohio during the 1995
calendar (tax) year.
-
QUESTION:
WHAT S CORPORATIONS ARE COVERED BY THE LEGISLATION?
ANSWER:
The legislation exempts all calendar year S corporations
that are not C corporations at any time during the calendar
year prior to the franchise tax year. The legislation
exempts all fiscal year end S corporations that are not C
corporations at any time during their fiscal year or years
ending prior to the franchise tax year.
CORPORATION FILING REQUIREMENTS
-
QUESTION:
FOR THOSE OHIO TAX YEARS FOR WHICH THE S CORPORATION IS
EXEMPT FROM THE FRANCHISE TAX, WHAT OHIO CORPORATE TAX FORM
SHOULD THE S CORPORATION FILE?
ANSWER:
Ohio Revised Code section 5733.09(B) requires that an S
corporation file a notice of the S election with the Tax
Commissioner between the first day of January and the
thirty-first day of March of each tax year for which the
election is in effect. A corporation should use Ohio Tax
Department Form FT-1120-S, Notice of S Corporation Status.
-
QUESTION:
MUST AN S CORPORATION FILE THE ANNUAL NOTICE, FORM
FT-1120-S, EVERY YEAR?
ANSWER:
Yes. The corporation must file the annual notice, Form
FT-1120-S, each and every tax year for which it claims
exemption from the franchise tax imposed by the franchise
tax laws set forth in Ohio Revised Code Chapter 5733.
-
QUESTION:
IS THE S CORPORATION ELECTION VOID FOR OHIO PURPOSES IF THE
CORPORATION FAILS TO FILE THE FORM FT-1120-S ANNUAL NOTICE?
ANSWER:
No. Filing the annual notice is not a requirement in order
to be treated as an S corporation for Ohio franchise and
income tax purposes. A corporation which is an S
corporation for federal income tax purposes is an S
corporation for Ohio franchise and income tax purposes even
if it fails to file the annual notice.
-
QUESTION:
WHAT IS THE PENALTY EITHER FOR FAILURE TO FILE THE ANNUAL
NOTICE OR FOR FILING THE ANNUAL NOTICE LATE?
ANSWER:
Ohio Revised Code section 5733.20 sets forth the procedure
whereby the Tax Commissioner can request that the Secretary
of State cancel the articles of incorporation of any
domestic corporation or the certificate of authority of any
foreign corporation which fails or neglects to make reports
required by Chapter 5733. In addition, Ohio Revised Code
sections 5733.21 and 5733.99 provide for penalties of not
less that $100 nor more than $1,000 against individuals who
exercise any corporate powers, privileges, or franchises
after cancellation of the articles of incorporation or the
certificate of authority for failure to make the reports
required by Chapter 5733 of the Ohio Revised Code. In
appropriate cases the Tax Commissioner will consider
criminal charges for those who intentionally refuse to file
the annual notice required by Ohio Revised Code section
5733.09(B). In addition, under Ohio Revised Code section
5733.28(A)(1) there is a $50 per month penalty (not to
exceed $500) for failure to file the annual
notice.6
-
QUESTION:
CAN AN OHIO CORPORATION CHOOSE TO BE AN S CORPORATION FOR
FEDERAL TAX PURPOSES BUT CHOOSE TO BE A C CORPORATION FOR
OHIO FRANCHISE TAX PURPOSES?
ANSWER:
No. The Ohio franchise tax law does not provide for such
"dual status".
-
QUESTION:
CAN AN OHIO CORPORATION CHOOSE TO BE A C CORPORATION FOR
FEDERAL INCOME TAX PURPOSES BUT CHOOSE TO BE AN S
CORPORATION FOR OHIO INCOME TAX PURPOSES?
ANSWER:
No. The Ohio franchise tax law does not provide for a dual
status.
RETROACTIVE ELECTIONS; PROSPECTIVE ELECTIONS
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- ON JANUARY 31, 1994 A CALENDAR YEAR C CORPORATION MAKES A
TIMELY ELECTION UNDER INTERNAL REVENUE CODE SECTION
1362(b)(1)(B) TO BE TREATED AS AN S CORPORATION RETROACTIVE
TO JANUARY 1, 1994.
- THE CORPORATION MAINTAINS ITS S STATUS FOR ALL OF 1994.
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
A corporation for which there is a valid retroactive
election pursuant to Internal Revenue Code section
1362(b)(1)(B) will be treated for Ohio tax purposes as an S
corporation for the entire taxable year if for federal
income tax purposes the corporation is an S corporation for
its entire taxable year. Given the facts set forth above,
the S corporation would be exempt from the 1995 Ohio
franchise tax imposed by Ohio Revised Code Chapter 5733.
However, since the corporation was not an S corporation for
its entire taxable year ending December 31, 1993, it is
liable for the 1994 franchise tax. That is, a corporation's
status on January 1 of the tax year is
notdeterminative of whether it is subject
to the franchise tax; rather, the corporation's status
during the taxable yearprior to January 1
of the tax year is determinative. See Sanders Health and Fitness,
Inc. vs. Joanne Limbach, (June 21, 1991) BTA Case
No. 88-E-559.
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- A FISCAL YEAR C CORPORATION HAS A NOVEMBER 30 YEAR
END.
- IT HAS BEEN A C CORPORATION FROM THE DATE OF
INCORPORATION THROUGH AND INCLUDING NOVEMBER 30, 1994.
- THE CORPORATION PROSPECTIVELY ELECTS (AND THE
SHAREHOLDERS CONSENT TO) S STATUS EFFECTIVE WITH THE FISCAL
YEAR BEGINNING DECEMBER 1, 1994.
- THE I.R.S. CONSENTS TO THE FISCAL YEAR END.
WHAT ARE THE TAX CONSEQUENCES UNDER THE FRANCHISE TAX LAWS
SET FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
The 1995 franchise tax report will be based upon (i) the
taxable income for the twelve month taxable (fiscal) year
ended November 30, 1994 and (ii) the net worth at December
1, 1994 (the net worth "business done" factor for the 1995
report will be based upon the twelve month taxable (fiscal)
year ended November 30, 1994).
If the corporation maintains its S status from December 1,
1994 through and including November 30, 1995, it will not
be subject to the 1996 franchise tax because it meets the
requirements set forth in Answer No. 13: the corporation
was not a C corporation at any time during its fiscal year
(ending November 30, 1995) prior to January 1 of the 1996
franchise tax year.
Below is our illustration of this fact-pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- A C CORPORATION HAS A JUNE 30 YEAR END.
- THE C CORPORATION REQUESTS AND THE IRS AGREES TO THE C
CORPORATION'S CHANGING TO A CALENDAR YEAR TAXPAYER WITH A
SHORT C TAXABLE YEAR ENDING DECEMBER 31, 1993.
- THE C CORPORATION THEN TIMELY ELECTS (AND THE
SHAREHOLDERS CONSENT TO) THE S ELECTION TO BE EFFECTIVE ON
JANUARY 1, 1994.
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAW SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:7
Pursuant to Paragraph (C)(2) of Administrative Code Section
(Rule) 5793-504, the 1994 franchise tax report will be
based on the eighteen month period beginning July 1, 1992
and ending on December 31, 1993. If the corporation is an S
corporation for the entire 1994 calendar year, the
corporation will owe no franchise tax for the 1995
franchise tax year.
Below is our illustration of this fact pattern:
REVOCATION AND TERMINATION
-
QUESTION:
WHAT ARE THE OHIO FRANCHISE TAX CONSEQUENCES IF AN S
CORPORATION BECOMES A C CORPORATION FOR SOME PERIOD OF TIME
DURING ITS CALENDAR (OR FISCAL) YEAR ENDING PRIOR TO THE
FRANCHISE TAX YEAR?
ANSWER:
Pursuant to Internal Revenue Code section 1362(e)(1)(B),
the corporation has a "short taxable year" for which the
corporation is a C corporation.
Because it was not an S corporation for its entire calendar
(or fiscal) year ending prior to January 1 of the franchise
tax year, the corporation will be liable for the Ohio
franchise tax for that portion of the calendar (or fiscal)
year beginning with the date of the termination/revocation
of the S status. An S corporation which terminates its S
status is not considered a "new taxpayer" as defined in
Administrative Code Section (Rule) 5703-5-01. See the
Questions and Answers that follow for more discussion
regarding the calculation of the franchise tax.
-
QUESTION:
HOW SHOULD A CALENDAR YEAR S CORPORATION CALCULATE ITS
FRANCHISE TAX FOR THE 1994 FRANCHISE TAX YEAR IF SOME TIME
DURING 1993 EITHER (i) THE SHAREHOLDERS PROSPECTIVELY
TERMINATE THE S ELECTION BY REVOCATION (EFFECTIVE IN 1993)
PURSUANT TO INTERNAL REVENUE CODE SECTION 1362(d)(1)(D) OR
(ii) THE CORPORATION CEASES TO BE AN S CORPORATION
PURSUANT TO EITHER INTERNAL REVENUE CODE SECTION 1362(d)(2)
OR SECTION 1362(d)(3)? ASSUME THE TERMINATING EVENT OCCURS
ON DECEMBER 30, 1993.
ANSWER:
If any of these circumstances occur, the corporation will
have been a C corporation for some portion of its taxable
year ending prior to January 1 of the 1994 tax year. The
corporation will owe the 1994 franchise tax based on (i)
its taxable income from the date of the terminating event
(in this example, December 30, 1993) through December 31,
1993 and (ii) its net worth at January 1, 1994 (the net
worth "business done" factor for the 1994 report will be
based upon the taxable year December 30, 1993 through
December 31, 1993.
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION IS A CALENDAR YEAR ENTITY.
- THE CORPORATION HAS BEEN AN S CORPORATION SINCE THE DATE
OF INCORPORATION.
- ON DECEMBER 1, 1994 THE SHAREHOLDERS CONSENT TO THE
TERMINATION OF THE S STATUS AND SPECIFY THAT THE TERMINATION
WILL BE EFFECTIVE JANUARY 1, 1995.
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
Since the corporation was an S corporation for its entire
taxable year ending prior to January 1 of the 1995 tax
year, the corporation is exempt from the 1995 Ohio
franchise tax (but not the 1996 franchise tax) imposed by
the Ohio Revised Code Chapter 5733.
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION IS A CALENDAR YEAR ENTITY.
- THE CORPORATION HAS BEEN AN S CORPORATION SINCE THE DATE
OF INCORPORATION.
- ON JANUARY 31, 1995 THE SHAREHOLDERS CONSENT TO THE
TERMINATION OF THE S STATUS AND SPECIFY THAT THE TERMINATION
WILL BE EFFECTIVE JANUARY 1, 1995.
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
Since the corporation was an S corporation during its
entire 1994 taxable year ending prior to January 1 of the
1995 tax year, the corporation is exempt from the 1995
franchise tax (but not the 1996 franchise tax) imposed by
Ohio Revised Code Chapter 5733.
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A NOVEMBER 30 FISCAL YEAR END.
- THE CORPORATION HAS BEEN AN S CORPORATION FROM THE DATE
OF INCORPORATION THROUGH AND INCLUDING NOVEMBER 30, 1993.
- IN NOVEMBER, 1993 THE SHAREHOLDERS CONSENT TO THE
TERMINATION OF THE S STATUS AND SPECIFY THAT THE TERMINATION
WILL BE EFFECTIVE DECEMBER 1, 1993.
WHAT ARE THE TAX CONSEQUENCES UNDER THE FRANCHISE TAX LAWS
SET FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
The corporation is not required to file a 1994 franchise
tax report since it was not a C corporation during any part
of its fiscal year (December 1, 1992 through November 30,
1993) which ended prior to January 1 of the 1994 franchise
tax year. However, the corporation will be liable for the
1995 franchise tax. The 1995 report will be based on (i)
the corporation's net income for the period December 1,
1993 through November 30, 1994 and (ii) the corporation's
net worth at December 1, 1994 (the net worth "business
done" factor for the 1995 report will be based upon the
twelve month taxable year December 1, 1993 through November
30, 1994).
Note: Although the corporation is a C corporation for some
period of time prior to January 1 of the 1994 tax year (in
this case, December 1, 1993 through December 31, 1993), it
will not owe any 1994 Ohio corporation franchise tax
because (i) the corporation is not a "new taxpayer" as
defined in Administrative Code Section (Rule) 5703-5-01(I)
and (ii) its taxable year as a C corporation did not end
prior to January 1 of the 1994 tax year. The corporation
will be liable for the 1995 Ohio corporation franchise tax.
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A JUNE 30 FISCAL YEAR END.
- IT HAS BEEN AN S CORPORATION SINCE THE DATE OF
INCORPORATION.
- THE S STATUS TERMINATES ON SEPTEMBER 1, 1993, BUT THE
CORPORATION DOES NOT CHANGE ITS FISCAL END (SO, THERE IS A
"SHORT" C TAXABLE YEAR BEGINNING SEPTEMBER 1, 1993 AND ENDING
JUNE 30, 1994).
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
The corporation is not subject to the 1994 franchise tax
because of the following:
- the corporation was not a C corporation for any part of
its taxable (fiscal) year (July 1, 1992 through June 30,
1993) prior to January 1 of the 1994 franchise tax year,
and
- the corporation's "short" taxable year as a C
corporation (September 1, 1993 through June 30, 1994) does
not end prior to January 1 of the 1994 tax year (the
corporation is not a "new taxpayer" as defined in
Administrative Code Section (Rule) 5703-5-01).
Pursuant to Internal Revenue Code section 1362(e)(1)(B),
the corporation has a short taxable year as a C corporation
(beginning on the date of the terminating event, September
1, 1993, and ending June 30, 1994). Consequently, for Ohio
franchise tax purposes, the corporation's 1995 franchise
tax will be based on (i) the corporation's net income for
the short taxable year (September 1, 1993 through June 30,
1994), and (ii) its net worth on July 1, 1994 (the net
worth "business done" factor for the 1995 report will be
based upon the ten month taxable year September 1, 1993
through June 30, 1994).
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A JUNE 30 FISCAL YEAR END.
- THE CORPORATION HAS BEEN AN S CORPORATION FROM THE DATE
OF INCORPORATION.
- THE S STATUS, TERMINATES ON JUNE 1, 1993 (THUS, THERE IS
A SHORT C TAXABLE YEAR COMMENCING JUNE 1, 1993 AND ENDING
JUNE 30, 1993).
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
The corporation is subject to the 1994 franchise tax
because the corporation was a C corporation during some
part of its fiscal year (June 1, 1993 - June 30, 1993)
which ended prior to January 1 of the 1994 franchise tax
year. The 1994 report will be based on (i) the
corporation's net income for the period June 1, 1993
through June 30, 1993 and (ii) the corporation's net worth
at July 1, 1993 (the net worth "business done" factor for
the 1994 report will be based upon the short taxable year
June 1, 1993 through June 30, 1993).
The 1995 franchise tax report will be based on (i) the
corporation's net income for the twelve month period July
1, 1993 through June 30, 1994 and (ii) the corporation's
net worth at July 1, 1994 (the net worth "business done"
factor for the 1995 report will be based upon the twelve
month taxable year July 1, 1993 through June 30, 1994).
Below is our illustration of the fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- THERE IS AN INTERNAL REVENUE CODE SECTION 1362 REVOCATION
OR TERMINATION OF A CORPORATION'S S STATUS.
- THE REVOCATION OR TERMINATION OCCURS OTHER THAN AT YEAR
END.
- THE REVOCATION OR TERMINATION RESULTS IN A SHORT C
TAXABLE YEAR.
- THE SHAREHOLDERS DO NOT ELECT TO HAVE ITEMS ASSIGNED TO
EACH SHORT YEAR UNDER NORMAL ACCOUNTING RULES AS SET FORTH IN
INTERNAL REVENUE CODE SECTION 1362(e)(3); INSTEAD, THEY
CHOOSE TO UTILIZE THE "PRO-RATA ALLOCATION" METHOD SET FORTH
IN INTERNAL REVENUE CODE SECTION 1362(e)(2).
WHAT ARE THE CONSEQUENCES UNDER THE FRANCHISE TAX LAWS SET
FORTH IN OHIO REVISED CODE CHAPTER 5733?
ANSWER:
The Tax Commissioner will generally follow the method of
calculating taxable income which the taxpayer chooses for
federal income tax purposes.
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- IN LATE JANUARY, 1993 A CALENDAR YEAR C CORPORATION
ELECTS (AND THE SHAREHOLDERS CONSENT TO) A TIMELY RETROACTIVE
ELECTION TO BE AN S CORPORATION EFFECTIVE JANUARY 1, 1993
PURSUANT TO INTERNAL REVENUE CODE SECTION 1362(b)(1)(B).
- SUBSEQUENTLY IN THE SAME TAXABLE YEAR (1993) THERE IS
EITHER A PROSPECTIVE REVOCATION OR TERMINATING EVENT PURSUANT
TO INTERNAL REVENUE CODE SECTION 1362(d)(1)(D).
WHAT ARE THE CONSEQUENCES UNDER OHIO REVISED CODE CHAPTER
5733?
ANSWER:
The Internal Revenue Code contains no specific prohibition
against a revocation being made in the first taxable year
in which a corporation elects to be an S corporation.
Consequently, a calendar year S corporation's net income
from January 1, 1993 (the beginning of the year) to the
date of revocation is exempt from the 1994 Ohio franchise
tax imposed by ORC Chapter 5733. Because of the prospective
S status revocation effective sometime later during its
first taxable year (1993) and because as a C corporation it
has a taxable year which ended prior to January 1 of the
1994 franchise tax year, the corporation will be liable for
the 1994 franchise tax. The 1994 report will be based on
(i) the corporation's net income for period commencing with
the date of the revocation of the S status through December
31, 1993 and (ii) the corporation's net worth at January 1,
1994 (the net worth "business done" factor for the 1994
report will be based upon the taxable year beginning with
the date of the revocation of the S status and ending
December 31, 1993.
Below is our illustration of the fact pattern:
CORPORATE CARRYFORWARD ITEMS
-
QUESTION:
ASSUME THAT A C CORPORATION INCURS AN OHIO NET OPERATING
LOSS CARRYFORWARD, AN OHIO INVESTMENT TAX CREDIT
CARRYFORWARD, AN OHIO EXPORT TAX CREDIT CARRYFORWARD,
AND/OR SIMILAR CARRYFORWARD AMOUNTS WHICH WERE NOT FULLY
UTILIZED PRIOR TO THE CORPORATION'S BECOMING AN S
CORPORATION. WILL THESE CARRYFORWARDS "PASS THROUGH" TO THE
SHAREHOLDERS?
ANSWER:
No. The Tax Commissioner will be guided by Internal Revenue
Code section 1371(b). As such, carryforwards arising from a
franchise tax year for which the corporation was subject to
the Ohio corporation franchise tax do not pass through to
shareholders for tax years for which the corporation is
exempt from tax. Accordingly, unused Ohio net operating
losses, unused investment tax credits, ACRS depreciation
adjustment items and unused export sales credit
carryforwards arising in a tax year prior to a tax year for
which the S corporation is exempt from the franchise tax do
not pass through to the shareholders.
However, nothing in the preceding paragraph shall prevent
treating a tax year, for which an S corporation is exempt
from tax, as a franchise tax year for purposes of
determining the number of franchise tax
years to which such unused amounts may be carried forward.
Thus, the fifteen year Ohio net operating loss carryforward
period, the three year investment tax credit carryforward
period, and the export sales credit carryforward limitation
period are not suspended for tax years during which the
corporation is exempt from tax.
For example, assume that a calendar year corporation has an
unused Ohio net operating loss carryforward arising from
its 1986 franchise tax report (based on its taxable year
ended December 31, 1985). Further assume that for federal
income tax purposes the corporation is an S corporation
from January 1, 1986 through December 31, 1999. In this
situation, in order to take advantage of the net operating
loss carryforward, the corporation must not be exempt from
the 2001 franchise tax and must file a 2001 franchise tax
report. However, if the corporation is still an S
corporation on December 31, 2000, it will not file a 2001
franchise report, and the net operating loss carryforward
will expire even though it has never been utilized.
SUPPLEMENTAL QUESTIONS AND ANSWERS NOT APPEARING
IN
THE APRIL 21, 1986 RELEASE
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QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A DECEMBER 31 YEAR END.
- ON OCTOBER 1, 1993 AN UNRELATED C CORPORATION HAVING A
JUNE 30 FISCAL YEAR END PURCHASES ALL OF THE S CORPORATION'S
OUTSTANDING STOCK (A TERMINATING EVENT).
- THE ACQUIRED CORPORATION CHANGES ITS ACCOUNTING PERIOD TO
JUNE 30, ITS NEW PARENT'S FISCAL YEAR END (THUS, THE ACQUIRED
CORPORATION WAS AN S CORPORATION FROM JANUARY 1, 1993 THROUGH
SEPTEMBER 30, 1993, AND IT WAS A C CORPORATION FROM OCTOBER
1, 1993 FORWARD).
MUST THE ACQUIRED CORPORATION FILE A 1994 OHIO CORPORATION
FRANCHISE TAX REPORT?
ANSWER:
No. The acquired corporation is not subject to the 1994
Ohio corporation franchise tax because (i) it is not a "new
taxpayer" as defined in Rule 5703-5-01 and (ii) it did not
have a C corporation taxable year ending prior to January 1
of the 1994 tax year, Ohio Administrative Code (Rule)
5703-5-04. The acquired corporation's 1995 Ohio corporation
franchise tax will be based on (i) the corporation's net
income for the period October 1, 1993 through-June 30, 1994
and (ii) the corporation's net worth at July 1, 1994 (the
net worth "business done" factor for the 1995 report will
be based upon the nine month taxable year beginning on
October 1, 1993 and ending on June 30, 1994).
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A JUNE 30 FISCAL YEAR END.
- ON JULY 1, 1993 A CALENDAR YEAR C CORPORATION PURCHASES
ALL OF THE OUTSTANDING STOCK OF THE S CORPORATION (A
TERMINATING EVENT).
- THE NEWLY-ACQUIRED CORPORATION THEN CHANGES ITS
ACCOUNTING PERIOD TO A CALENDAR YEAR END IN ORDER TO CONFORM
TO ITS NEW PARENT'S CALENDAR YEAR END. THUS, THE ACQUIRED
CORPORATION HAS A TWELVE MONTH S TAXABLE YEAR, (JULY 1, 1992
THROUGH JUNE 30, 1993) FOLLOWED BY A SHORT C TAXABLE YEAR
(JULY 1, 1993 THROUGH DECEMBER 31, 1993).
MUST THE ACQUIRED CORPORATION FILE A 1994 OHIO CORPORATION
FRANCHISE TAX REPORT?
ANSWER:
Yes. The acquired corporation is subject to the franchise
tax for tax year 1994 and must file the 1994 Ohio
corporation franchise tax report because it has a C
corporation taxable year (July 1, 1993 through December 31,
1993) which ended prior to January 1 of the 1994 Ohio
franchise tax year. Ohio Administrative Code (Rule)
5703-5-04.
Below is our illustration of this fact pattern:
-
QUESTION:
ASSUME THE FOLLOWING FACTS:
- AN S CORPORATION HAS A JUNE 30 FISCAL YEAR END.
- ON APRIL 1, 1994 AN UNRELATED C CORPORATION HAVING A
MARCH 31 FISCAL YEAR END PURCHASES ALL OF THE OUTSTANDING
STOCK OF THE S CORPORATION (A TERMINATING EVENT).
- THE NEWLY-ACQUIRED CORPORATION THEN CHANGES ITS
ACCOUNTING PERIOD TO MARCH 31 IN ORDER TO CONFORM TO ITS
PARENT'S MARCH 31 FISCAL YEAR END. THUS, THE ACQUIRED
CORPORATION HAS A TWELVE MONTH S TAXABLE YEAR (JULY 1, 1992
THROUGH JUNE 30, 1993) FOLLOWED BY A SHORT S TAXABLE YEAR
(JULY 1, 1993 THROUGH MARCH 31, 1994), AND THEN FOLLOWED BY A
TWELVE MONTH C TAXABLE YEAR (APRIL 1, 1994 THROUGH MARCH 31,
1995).
MUST THE ACQUIRED CORPORATION FILE A 1995 OHIO CORPORATION
FRANCHISE TAX REPORT?
ANSWER:
No. The acquired corporation is not subject to the 1995
Ohio corporation franchise tax because (i) it is not a "new
taxpayer" as defined in Ohio Administrative Code (Rule)
5703-5-01 and (ii) it did not have a C corporation taxable
year ending prior to January 1 of the 1995 tax year, Ohio
Administrative Code (Rule) 5703-5-04. The acquired
corporation's 1996 Ohio corporation franchise tax will be
based on (i) the corporation's net income for the period
April 1, 1994 through March 31, 1995 and (ii) the
corporation's net worth at April 1, 1995 (the net worth
"business done" factor for the 1996 report will be based
upon the twelve month taxable year beginning on April 1,
1994 and ending on March 31,1995).
Below is our illustration of this fact pattern:
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QUESTION:
WHAT ARE THE FRANCHISE TAX EFFECTS OF A MERGER OF A C
CORPORATION INTO AN S CORPORATION WHERE PRIOR TO THE MERGER
THE C CORPORATION AND THE S CORPORATION WERE BROTHER-SISTER
CORPORATIONS OWNED BY THE SAME INDIVIDUAL OR FAMILY? DOES
THE ORC SECTION 5733.053 TRANSFEROR STATUTE APPLY TO THE
SURVIVING S CORPORATION? ASSUME (I) THE MERGER OCCURS ON
DECEMBER 30, 1994 AND (II) BOTH CORPORATIONS ARE CALENDAR
YEAR CORPORATIONS.
ANSWER:
The Department's position is that ORC section 5733.053
requires that the S Corporation file a 1995 Ohio
Corporation franchise tax report and pay the tax based upon
the net income basis. The S corporation must include on its
1995 report the income earned by the merged C corporation
during the period January 1, 1994 through December 30,
1994. That is, the C corporation is not subject to the tax,
but the S corporation is subject to the tax and must
include the C corporation's income. However, the S
corporation will not be subject to the 1995 net worth basis
franchise tax.
Below is our illustration of this fact pattern:
For further information see the Income Tax Audit Division's
September 24, 1993 Information Release.
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QUESTION:
WHAT IS THE STATUTORY AUTHORITY FOR OHIO'S IMPOSING THE
OHIO INCOME TAX ON NONRESIDENT SHAREHOLDERS OF S
CORPORATIONS DOING BUSINESS IN OHIO?
ANSWER:
The position of the Ohio Department of Taxation is that ORC
section 5747.02 provides the statutory authority for Ohio
to impose the Ohio income tax on nonresident shareholders
of S corporations doing business Ohio. ORC section 5747.02,
in part, imposes the income tax "on every individual and
every estate... earning income in the
state" (emphasis added).
For support of the Department's position that it can tax
nonresident shareholders of S corporations, see
Kulick v.
Department of Revenue, 290 Or. 507, 624 P.2d 93
(1981), appeal dismissed, 454 U.S. 803 (1981) and
Isaacsan v. Iowa
State Tax Commission, 183 N.W. 2d 693 (Iowa S. Ct.,
1971).
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QUESTION:
A FLORIDA S CORPORATION PER FORMS MANAGEMENT SERVICES FOR A
RELATED OHIO S CORPORATION. IS THERE AUTHORITY FOR THE TAX
COMMISSIONER TO REQUIRE THAT THE TWO CORPORATIONS COMBINE
THEIR INCOMES FOR PURPOSES OF APPLYING THE ALLOCATION AND
APPORTIONMENT PROVISIONS OF CHAPTER 5747?
ANSWER:
Yes. Although there are no Ohio cases addressing this
issue, there is authority in other states' case law which
will allow the Department to utilize ORC section
5747.21(D)8 in order to require
a combination.
Some explanation is in order. Nonresident individuals who
have invested in S corporations doing business in Ohio are
establishing Florida-based S corporations which may be
inappropriately siphoning off profits from the Ohio S
corporations. Often, combining the two S corporations more
fairly reflects the extent of the companies' Ohio activity
and, thus, the shareholder's income earned in Ohio.
ADDITIONAL INFORMATION
-
QUESTION:
IF I HAVE FURTHER QUESTIONS, WHOM DO I CONTACT?
ANSWER:
You can write to the following:
Ohio Department of Taxation
Income Tax Audit Division
Attn: S Corporations Unit
P. 0. Box 2476
Columbus, Ohio 43266-0076