Dave Cain: Welcome to unsuitable on Rea Radio, the award winning financial services and business advisory podcast that challenges your old school business practices and the traditional business suit culture. Our guests are industry professionals and experts who will challenge to think beyond the suit and tie while offering you meaningful modern solutions to help enhance your company’s growth. I’m your host Dave Cain.
Ever since the Tax Cut and Jobs Act became the law of the land, that’s been the conversation at Happy Hour, around the grill in the backyard. That being said, we would be amiss not to touch on the importance of municipal income taxes. After all they can be just as complex as the federal tax returns.
Dan Bialek, a municipal tax ninja in our northeast Ohio region, also known as Cleveland Browns territory, joins us today’s episode to talk about the Ohio Business Gateway, the elimination of the throwback rule, the 20 day rule and more. Buckle up listeners, we’re in for an informative ride.
Welcome to unsuitable Dan.
Dan Bialek: Thanks for having me.
Dave: How’d you like that intro?
Dan: I like the Cleveland Browns part in particular. I’ve been a Browns fan my whole life. And this is the year that we win it all, I think.
Dave: Me too. We’re going for it.
Dan: I like it.
Dave: You know in the intro we talked about Happy Hours and the grill. You like to grill in the backyard?
Dan: Yeah, absolutely. Especially this time of year.
Dave: What’s your favorite recipe on the grill?
Dan: Filet mignon without a doubt.
Dave: Ooo.
Dan: Yes.
Dave: Yeah.
Dan: We can make it as good as just about any of the restaurants out there.
Dave: What’s the side dish with that?
Dan: My wife makes a terrific Bearnaise sauce and then we do a little baked potato on the side with some vegetables. Can’t beat it.
Dave: Red wine with that?
Dan: Yeah, red wine, beer. You name it.
Dave: Combination.
Dan: You can’t go wrong when you got a good steak.
Dave: Hey, we’re talking about the Ohio Business Gateway, OBG I guess are the initials but let’s start off with that. Lot of our listeners probably somewhat familiar with Ohio Business Gateway but what in the heck is that thing? Little controversy going on with there.
Dan: Yeah, so a lot of controversy going on. Centralized collections is really the theme there. And that the complexity of multiple filings has been a burdensome issue for taxpayers really all around the state.
Dave: You mean multiple filings in various cities.
Dan: Correct, yeah. So the goal here is for all those clients who file in 10, 20, 30 municipalities to centralize that on the Ohio Business Gateway. So they’re filing one return instead of say 20.
Dave: Okay, on the surface that sounds pretty good.
Dan: It sounds like a really good deal. So that’s the benefit. One of the push backs is from the municipalities. They’re concerned about how the state’s going to handle the funds. I think at this point it’s probably too new to determine what’s going to come of it but it’s a highly contested topic from both municipalities and then the taxpayer.
Dave: Okay, well let’s start out from our end, if I’m a business owner I can go on and just jump online and file one return instead of paying you to file 30 returns. So right away I’m a bit of a winner.
Dan: Yeah, so in theory you’re a big winner because your compliance costs are going down. And as a firm, at Rea, we’re not trying to essentially kill our clients with huge fees on city tax preparation. So if there’s a way that we can save you money on fees, we’re going to do it and we’re going to try and follow that method. So in that instance you’re a winner. The one thing that I’ll say on the other side of that is although you’re filing one return, you’re still filing in 30 different cities with 30 different rule sets. So the complexity still could be there.
Dave: Still there.
Dan: It’s not as much compliance where you’re actually filing 30 separate returns.
Dave: Papers. It’s all electronic too.
Dan: Correct.
Dave: So there is some advantage. What about the audit piece of that. My risk of an audit going up?
Dan: So to be determined on that. The answer to that is we don’t know because the state is going to handle the audits going forward if you file on the Ohio Business Gateway. If you continue to file as you have through RITA or through the regular city municipalities that administer their own taxes, they’ll continue to handle the audits going forward. So in theory the state has more capacity, they have more employees so I would think that there’s potential that they would have more ability to audit but again, to be determined on that.
Dave: The Ohio Business Gateway for municipality filing, is that, that’s new in 2018?
Dan: Yeah, so new in 2018. So how that works is if you want to file your 2018 return on the Ohio Business Gateway you had to register on March 1st or before of 2018 to do that. So that’s if you’re account or you’re a taxpayer. So since that deadline has already come and gone the soonest that you can file on the Ohio Business Gateway if you haven’t already registered would be your 2019 tax returns. So you’d have to wait a year which isn’t the end of the world. If you’re a taxpayer who files in 30, 40 cities and you haven’t registered on the gateway, I don’t think it’s a bad thing to let it play out and see how everything kind of unfolds. Let the kinks kind of work themselves out.
Dave: First year.
Dan: First year.
Dave: Let somebody else work through that.
Dan: Right. And then assuming it ends up being beneficial to the taxpayer, you can register next year and then we’ll end up getting, we’ll get rolling with that and hopefully end up saving you compliance fees and other hassles.
Dave: Right. What is Rea and Associates position on the Ohio Business Gateway? Does that mirror your opinion? Maybe share that with me.
Dan: So Rea’s position is similar to kind of what I just stated in that we’re advising clients that is probably going to be an avenue that’s worthwhile. Especially if you file in 10 or more cities or municipalities. That’s kind of our threshold. And if you do that, we’re going to probably advise to file or register on the gateway starting next year. The benefit as I said, would be just less compliance cost, less tax returns that you have to file. It seems to just make things easier if you do that.
But we didn’t want to jump in right away before the uncertainties were kind of worked out. And so I just think it’s better for our taxpayers to not rush in. Wait a year and then assuming everything goes fine we’ll register and we’ll get rolling next year.
Dave: And it’s good thought. Seems like it’s a good idea and again you’d mentioned the actually paper filing of stuff and schedules and everything. That’s going to become a lot easier but the complex issues are still there if not even more so than in the past.
Dan: Yeah, so the complex issues will always be there until the law.
Dave: What are you going to do about that?
Dan: Well it’s funny you say that. I actually just had …
Dave: Aren’t you in charge of this piece for the firm?
Dan: I’m working on it.
Dave: You’re working on it.
Dan: And part of that was I just had lunch with a former podcast guest, Greg Saul.
Dave: Sure.
Dan: At the Ohio Society.
Dave: Well name dropping. Everybody like to name drop on this show.
Dan: Absolutely, yeah. And so Greg was giving me some inside scoop on his side and the lobbying that he does to try and make sure everything’s fair and easy to follow. We’re going in the right direction. I think as far as muni goes. But there’s still over 600 municipalities in Ohio that administer taxes.
Dave: 600?
Dan: 600. And all of them for the most part have different sets of laws and ordinances and regulation. So when you talk about the complexity of the federal return and you talk about our 50 states’ returns, those are all complex but oftentimes the municipalities and the city returns can be harder to file and to administer than even the federal or the state returns.
Dave: Right, right. And as we’ve talked before on the podcast, we had number of guests on here that’s talked about how the Ohio Society of CPAs which is our professional association that we belong to has gone to great lengths to fight and get uniformity and municipal tax regulations across the state like you’d mentioned there’s 600. So there has been a dent made in that but there’s still a lot more work to do.
Dan: Yeah, there’s a lot more work to do. Each city just to give you an example of one of the laws that each city can kind of set their own rule on is S-corp pass through income. So if I’m an owner of an S-corp and I’m filing.
Dave: And we have a lot of them.
Dan: We have a lot of clients that are. And that income flows through and passes through your personal return, you also have to file a city return and the question becomes, do I need to report that S-corp income on my city return or not? And the answer to that is it depends because each city has their own rule on that topic. So as something as seems so basic and broad as S-corp pass through income, there’s not one answer that fits all.
Dave: Right. Right. And I suppose and maybe you can weigh in on this, as the in the federal tax reform is in play and certainly taxable income is being decreased in a lot of areas, that’s going to hit probably the municipalities pretty hard in some areas. So they have to combat that drop in tax revenue as well.
Dan: It’s going to hit in two different ways. Some pro some against. One of the big impacts of the new tax reform laws, the domestic production activities deduction which is no longer going to be a deduction for federal purposes. Which means the cities that ordinarily got to deduct that are no longer going to be able to get that deduction on the city returns. So that’s actually an anti-taxpayer move as a result of the tax reform.
Dave: Can I dive into a personal question or a minute?
Dan: Absolutely.
Dave: When you’re at social event, networking or Happy Hour, do people come up to you and just pick your brain and talk about municipal tax?
Dan: Well yeah. It’s an obvious question because it’s such a thrilling topic. I’m sure you’d be just assume that that’s what happens. And that’s probably how I got my wife and other things like that just because it’s such a …
Dave: It’s been working for you.
Dan: It’s been working for me. It’s the angle that I take to try and make friends.
Dave: Does your wife understand the municipal tax reform and all of that?
Dan: She doesn’t care at all.
Dave: She doesn’t care at all.
Dan: She doesn’t care at all, no. No. I actually go out of my way to avoid talking work when I get home.
Dave: Well how many cities do you file in personally?
Dan: Funny you ask that.
Dave: ‘Cause you work in two locations for Rea and Associates, I think the Mentor and Independence and where you live and everything. You live it.
Dan: Ironically the city tax expert in the firm doesn’t file in any cities because I live in a township.
Dave: Oh you’re a rebel, huh?
Dan: So I’m a rebel in that I don’t file in any cities. It’s sort of ironic but that doesn’t mean I don’t pay city taxes ’cause I do. Wherever I work. I work in Mentor and Independence so I’m obviously giving them taxes.
Dave: I thought you were a rebel. I thought that was it.
Dan: No. No, no, no.
Dave: Okay, okay.
Dan: I’m still following the law. I just don’t file on any city tax municipalities or districts.
Dave: Great, great. In the introduction today we talked about there’s elimination of a throwback rule with us both being football fans when you started talking about that I thought there was a change in the NFL with some kind of lateral pass or throwback but apparently this has something to with muni tax.
Dan: Yeah. So they did, I think the NFL …
Dave: What is the throwback rule?
Dan: I was going to say the NFL did just make a change to the definition of a catch.
Dave: Yes.
Dan: So good transition there. But the throwback …
Dave: We call it a segue in our business.
Dan: There you go. Segue, okay, I’m learning this stuff. The throwback rule essentially is you throw the sale back to where it was originated. That was the old rule.
Dave: That’s the old rule.
Dan: That’s the old rule. So 2017 and before, I’ll give you an example. If I’m a manufacturer or distributor and I ship my product from Columbus to any other city or state in the country, the sale would in the old rule be thrown back to Columbus meaning it’s sourced and taxed to Columbus.
Dave: So Columbus, okay.
Dan: That’s the old rule. The new rule says starting in 2018 and beyond the throwback rule’s gone. So if I ship from Columbus to say Cleveland.
Dave: Or Bixlorville.
Dan: Or Bixlorville, right, there you go. That sale would not be taxable to Bixlorville or Columbus unless there’s one catch, unless I have employees who regularly solicit sales in Bixlorville. Which doesn’t happen often. So assuming that’s not the case, that sale is no longer sourced to any city. It becomes a quote, nowhere sale. And the benefit there is if I’m a taxpayer of ordinarily Columbus, I no longer have to pay as much Columbus tax.
Dave: No way. Whoa, let’s get some clarity on this because this sounds like this is a, I don’t know if this is a tax trap or a tax savings opportunity. ‘Cause before I’d just say, “Look 100% of my sales are in Columbus or Dublin or Zanesville or Marietta,” now you’re saying that’s not the case.
Dan: It’s not the case. Yeah. And this is a law is obviously new so it’s just changed. And not many people are talking about it. But it’s a really big deal because there’s I think they said the state has come and said they expect taxpayers to save somewhere in the $20 million range in 2018. Just on this law change alone. So it’s a huge deal that everyone’s stuck on centralized collection and angry about either one or the other side. But this elimination of the throwback rule is going to save our clients big money. And it’s important for the clients too, if they’re not working with Rea to ask their CPA, “Hey, tell me about this throwback rule. Am I getting a benefit from it.”
Dave: Well okay, let’s dive into this a little bit further ’cause as we talk on this show often areas of risk and areas to look at for saving some money et cetera in rate of returns, what about my accounting records? How am I going to track this stuff? How am I going to tell you where my sales are?
Dan: It’s really important to know.
Dave: You’re going to ask me, I know how aggressive you are. You won’t let me file that thing.
Dan: I won’t let you file it. I need to know about your business before I’m filing your return. So I need to know where you’re shipping goods from and where you’re shipping them to. And if you give me those two answers we’re able to determine the best tax strategy for you and that’s obviously within the law.
Dave: So there’s another piece of advice to our listeners is we need to look at the records internally in how you’re tracking your sales. It just doesn’t go to gross sales now. You may have to do some work arounds in your trial balance and your QuickBooks accounting. Do you know QuickBooks?
Dan: Oh I know high level.
Dave: You’re high level QuickBooks guy?
Dan: High level. We have amazing employees in our office that help me with QuickBooks details.
Dave: You have them on speed dial.
Dan: Yes. I call them all the time and they make fun of my lack of QuickBooks knowledge. I used to be the young guy who knew software. Now I’m the old guy who doesn’t.
Dave: Who doesn’t know software. Join the crowd. It’s been a great ride, isn’t it?
Dan: It just happened overnight. I’m not sure how that did.
Dave: Getting old or not knowing the software?
Dan: Well both and losing my hair and all that. Comes with age.
Dave: Sure, sure. So throwback rule, that’s a biggie. That’s a big. That’s the first we’ve heard about that on this podcast and we’ve had your colleagues on a number of times.
Dan: Yeah, it’s a big deal and I don’t think people are talking about it enough because there’s opportunities for huge tax savings. And just the one takeaway on this is if you’re a business owner or you’re in the accounting department, make sure you’re tracking where your sales are shipped from and shipped to and then also make sure you’re tracking where your employees are working. So if you’ve got employees soliciting sales in certain cities we need to know about that.
Dave: Well you hit on something I guess is maybe even more important than that, it’s going to be tough for business owners and our clients across the board to track all of this stuff. I think it becomes like you said, it’s now your job to make that inquiry of what’s going on in the business. And if you’re not making that inquiry, I’m not making that inquiry, we’re not doing our job very well.
Dan: Exactly.
Dave: So we’ve got to dig into the detail much more than maybe we ever have before.
Dan: Right. It matters a lot more and there’s a chance that as taxpayers are making their quarterly estimates this year, that if this throwback rule elimination helps them which it is going to help a lot of our clients, then they’re going to end up getting big refunds when we file next year.
Dave: So let me make sure I have this correct. It’s effective January 1st 18.
Dan: Correct.
Dave: And it’s expected to save Ohio taxpayers $22 million in 2018?
Dan: Right. Yeah, it’s a huge deal. And the savings are just going to be significant. When you think, hey I need to get my taxes filed. It’s easy to think I need to get my federal and my state, get all that done correctly. Oftentimes the municipalities are forgotten about and this is where we can shine for our clients and help them get these savings.
Dave: That’s almost as much as LeBron makes in a year.
Dan: Almost, not quite. Or maybe it’s almost as much as you make. I’m not sure.
Dave: Could be.
Dan: I’m just throwing it out there.
Dave: Hey the royalties off this podcast are going high. So keep up the good work. I’m counting on you to bring home some money on this show.
Dan: Well I figure I’m going to be part of those royalties. So I’m in.
Dave: Think again buddy. 20 day rule. What is that? Does that mean, again I’ll use an example. You work in two of the Rea and Associates office in northeast Ohio, Mentor and Independence and then you float around the state. Tell me about this 20 day rule.
Dan: Yeah, so perfect example is me. For instance right now I’m in Dublin in Columbus, I’m not sure where. Where am I?
Dave: You’re in Dublin.
Dan: I’m in Dublin. Okay, so I would need to file Dublin city taxes if I was spending 21 …
Dave: Want me to hit mute? Or you want me to send your name and social security number over to them?
Dan: We’re good. I told you I’m a law abiding citizen. We’re good. So I would need to personally file in Dublin if I spent 21 days or more working in this city. This is the first time I’ve stepped foot in Dublin in this year. So because of that I don’t need to file in Dublin. Now Independence and Mentor are two different stories. I work there more than 20 days during the year. So therefore I need to file in both of those locations.
Dave: So this is at the individual level not at the business level.
Dan: Correct.
Dave: So that as an individual you would have to track that.
Dan: Well so the businesses actually still get involved because they’re the ones that control where the employees payroll withholding comes from. So it would Rea and Associates responsibility to treat that right.
Dave: So if you have a workforce that travels specifically and again as the amount of monitors that Rea and Associates have for an example, that’s worth tracking at times.
Dan: Absolutely. Yeah, it’s if the biggest clients that this really matters for are like construction companies where they’ve got employees that are traveling all over the state. And the old rule said, if you spend 12 days or more you’ve got to file in all these cities. So what would happen is again, compliance nightmare. All these taxpayers and businesses had to track all these different cities and filings and dates and where they were at and where they were going and we finally just said, let’s make it easier. Let’s make that 20 days. I would prefer to even have that number go up but that hopefully something we can work on in the future because again it’s still difficult for these businesses to track where their employees are. But it’s a step in the right direction.
Dave: In the few minutes we have left let’s just kind of review what we covered. Ohio Business Gateway sounds like it’s going to be a good thing for the taxpayer and our clients. Elimination of the throwback rule very positive and the 20 day rule. Those are all pretty business friendly tax attributes for our clients and Ohio related businesses.
Dan: Yeah, we’re going in the right direction. I think all three of these are pro-business, pro-taxpayer. Not necessarily all three of them are going to save us tons of money. The throwback rule potentially could. The other thing is, the other two items are really just trying to make things simpler. And at the end of the day when you have 600 municipalities setting 600 different ordinances in the state, things can get pretty complicated. And so if we’re able to make that simpler for not only us as tax preparers, as CPAs, as consultants but also for the taxpayers themselves, I think that’s what everybody wants and that’s a win win for everyone.
Dave: Right. As we close down here, give us Bialek’s law for 2018 in regards to municipal income tax. What are two or three things our listeners can do to reduce their tax bill at the municipal level? Or maybe not reduce but eliminate the risk.
Dan: So I’ll give you one that’s really good instead of two or three that are just okay, how’s that?
Dave: Just give me a home run.
Dan: All right.
Dave: Is this a home run?
Dan: This is a home run.
Dave: All right.
Dan: So here what you need to do. If you get your W2 or your pay stub and you’re an employee, look at the municipal income tax line and see where the withholding is coming from. And make sure that that actually the city or cities that you’re working in. I had a client couple years ago who was withholding Cleveland income tax from their paycheck and they had never stepped foot in Cleveland to work there at all. Because the business headquarters were in Cleveland that the employer was withholding Cleveland tax. So what happened was, they were overpaying Cleveland tax for years and years and years and we were able to file and get them a refund and save them over $12,000 because their employer didn’t know what they were doing. So check your pay stub, check you’re W2 and make sure that the withholding city is actually where you’re working.
Dave: There’s our home run. We’ve been looking for a home run.
Dan: There it is.
Dave: It’s not a home run, it’s solid triple.
Dan: I’ll take it.
Dave: Yeah. See, this is a live audience. They like it. They give me a thumbs up.
Dan: There’s 20,000 people here listening to me.
Dave: That’s right. That’s right. Our guest today has been Dan Bialek a municipal tax specialist located in Rea and Associates northeast Ohio region, Independence and Mentor. And he does file his income tax as so he attested to today. So appreciate, thanks again for joining us on unsuitable today.
Dan: Thanks for having me.
Dave: There’s certainly a lot of information a business owner should be aware of especially if we’re talking about Ohio based businesses.
Listeners, if you have questions about today’s episode or like to learn more about how municipal tax regulation will impact your bottom line, send an email to podcast@reacpa.com and we’ll connect you to a member of our state and local tax team. Feel free to also jump on YouTube, SoundCloud or iTunes and leave us some feedback. Until next time, I’m Dave Cain encouraging you to loosen up your tie and think outside the box.
Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea and Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.