(a) Separate Accounting Method.
(1) The net profits allocable to the taxing community from business, professional, or other activities conducted in said taxing community by corporations or unincorporated entities (whether resident or non-resident) shall be determined from the records of the taxpayer if the taxpayer has bona fide records which disclose with reasonable accuracy what portion of his net profits is attributable to that part of his activities conducted within said taxing community.
(2) If the books and records of the taxpayer are used as the basis for apportioning net profits rather than the business allocation formula, a statement must accompany the return explaining the manner in which such apportionment is made in sufficient detail to enable the Administrator to determine whether the net profits attributable to his taxing community are apportioned with reasonable accuracy. See Section 191.04(c).
(b) Business Allocation Percentage Method.
(1) The portion of the entire net profits of a taxpayer to be allocated as having been derived from within this Municipality, in the absence of actual records thereof, shall be determined by multiplying the entire net profits by a business allocation percentage to be determined by a three-factor formula of property, payroll and sales.
(2) The business allocation percentage shall be determined as follows:
A. Step 1- Ascertain the percentage which the average net book value of real and tangible personal property, including leasehold improvements owned or used in the business and situated within the City of Lorain, is of the average net book value of all real and tangible personal property, including leasehold improvements owned or used in the business wherever situated, during the period covered by the return. Average net book value of property may be computed on a monthly, quarterly, semi-annual or annual basis, provided such method is consistently followed each year.
The percentage of taxpayer's real and tangible personal property within this Municipality is determined by dividing the average net book value of such property within the City of Lorain (without deduction of any encumbrances) by the average net book value of all such property within and without the City of Lorain. In determining such percentage, property rented by the taxpayer, as well as real and tangible personal property owned by the taxpayer, must be considered.
1. The net book value of real and tangible personal property rented by the taxpayer shall be determined by multiplying gross annual rents payable by eight (8).
2. Gross rent means actual sum of money or other consideration payable, directly or indirectly, by the taxpayer for the use and possession of property and includes:
a. Any amount payable for the use or possession of real and tangible personal property or any part thereof, whether designated as a fixed sum of money or as a percentage of sales profits or otherwise.
b. Any amount payable as additional rent or in lieu of rent such as interest, taxes, insurance, repairs or other amount required to be paid by the terms of a lease arrangement.
B. Step 2 - Ascertain the percentage which the total wages, salaries, commissions and other compensation of employees within the City of Lorain is of the total wages, salaries, commissions and other compensation of all the taxpayer's employees within and without the City of Lorain during the period covered by the return.
1. Wages, salaries and other compensation may be computed on the cash or accrual basis. The basis does not have to be in accordance with the method of accounting used in the computation of the entire net income of the taxpayer.
2. In the case of an employee who performs services both within and without this Municipality, the amount treated as compensation for services performed within this Municipality shall be deemed to be:
a. In the case of an employee whose compensation depends directly on the volume of business secured by him, such as a salesman on a commission basis, the amount received by him for the business attributable to his efforts within this Municipality.
b. In the case of an employee whose compensation depends on other than the volume of business transacted, the proportion of the total amount received by him, which is his working time within the City of Lorain of his total working time.
3. For the purposes of the computation, wages should include a reasonable amount attributable to the services of owners or partners (see Section 191.04(b)(2)B.2.) for the amount treated as compensation for services performed within this Municipality.
C. Step 3 - Ascertain the percentage which the gross receipts of the taxpayer derived from sales made and services rendered in the City of Lorain is of the total gross receipts wherever derived during the period covered by the return.
1. The following shall be considered sales made within this Municipality.
a. All sales made through retail stores located within this Municipality to purchasers within or without this Municipality except so much of said sales to purchasers outside this Municipality that are directly attributable to regular solicitations made outside this Municipality personally by taxpayer's employees.
b. All sales of tangible personal property delivered to purchasers within this Municipality if shipped or delivered from an office, store, warehouse, factory or place of storage located within this Municipality.
c. All sales of tangible personal property delivered to purchasers within the City of Lorain, even though transported from a point outside this Municipality, if the taxpayer is regularly engaged through its own employees in the solicitation or promotion of sales within this Municipality and the sale is directly or indirectly the result of such solicitation.
d. All sales of tangible personal property shipped from an office, store, warehouse, factory or place of storage within the City of Lorain to purchasers outside this Municipality if the taxpayer is not, through its own employees, regularly engaged in the solicitation or promotion of sales at the place of delivery.
e. Charges for work done or services performed incident to a sale, whether or not included in the price of the property, shall be considered gross receipts from such sale.
2. In the application of the foregoing sales determination factors, a carrier shall be considered the agent of the seller regardless of the FOB point or other conditions of the sale and the place at which orders are accepted or contracts legally consummated shall be immaterial. Solicitations of customers outside of the Municipality by mail or telephone from an office or place of business within this Municipality shall not be considered a solicitation of sales outside this Municipality.
D. Step 4- Add the percentages determined in accordance with Steps 1, 2 and 3, or such of the aforesaid percentages as may be applicable to the particular taxpayer's business, and divide the total so obtained by the number of percentages used in ascertaining said total. The result so obtained is the business allocation percentage. In determining the average percentage, a factor shall not be excluded from the computation merely because said factor is found to be allocable entirely outside this Municipality. A factor is excluded only when it does not exist anywhere.
E. Step 5- The business allocation percentage determined in Step 4 above shall be applied to the entire taxable net profits of the taxpayer wherever derived to determine the net profits allocable to this Municipality.
(c) Substitute Method. In the event a just and equitable result cannot be obtained under the formula, the Administrator, upon his own initiative or upon application of the taxpayer, may substitute other factors in the formula or prescribe other methods of allocating net income calculated to effect a fair and proper allocation.
(d) Rentals From Real Property.
(1) Rentals received by the taxpayer are to be included in the computation of net profits from business activities only if, and to the extent that, the rental, ownership, management or operation of the real estate from which such rentals are derived (whether so rented, managed or operated by the taxpayer individually or through agents or other representative) constitutes a business activity of the taxpayer in whole or in part.
(2) Where the gross monthly rental on any real properties, regardless of number and value, aggregate in excess of one hundred dollars ($100.00), it shall be prima facie evidence that the rental, ownership, management or operation of such properties is a business activity of such taxpayer and the net income of such rental properties shall be subject to tax: provided that in the case of commercial property, the owners shall be considered engaged in a business activity when the rental is based on a fixed or fluctuating percentage of gross or net sales, receipts or profits of the lessee, whether or not such rental exceeds the rental rate of this Municipality: provided further that in the case of farm property, the owner shall be considered engaged in a business activity when he shares in the crops or when the rental is based on a percentage of the gross or net receipts derived from the farm, whether or not the gross income exceeds the rental rate of this Municipality: and provided further that the person who operates a licensed rooming house shall be considered in business whether or not the gross income exceeds the rental rate of this Municipality.
(3) In determining the amount of gross monthly rental of any real property, periods during which rental are not received shall not be taken into consideration by the taxpayer.
(4) Rental income received by a taxpayer engaged in the business of buying or selling real estate shall always be considered as part of business income.
(5) In determining the taxable income from rentals, the deductible expenses shall be of the same nature, extent and amount as are allowed by the Internal Revenue Service for federal income tax purposes.
(6) Owners of rental property who are non-residents of the City of Lorain, whether individuals or business entities, are subject to tax only on the income from real property located in this Municipality, and in determining whether gross monthly rentals exceed the rental rate of this Municipality, only the income from such properties located within this Municipality shall be considered.
(7) Owners of rental property who are residents of this Municipality are subject to tax on the net income from rentals (to the extent above specified), regardless of the location of the real property owned, excepting that if any such property is located and subject to a municipal income tax by another taxing municipality, credit shall be claimed in accordance with Section 191.08.
(8) Owners of rental property who are not residents of this Municipality may offset net losses against net profits only between rental properties located in this Municipality.
(9) Corporations owning or managing real estate are taxable only on the portion of income derived from property located in this Municipality.
(10) Any resident or non-resident receiving rental income from commercial property, farm property or a licensed rooming house, irrespective of the rental amount limitations, must file a return whether or not there is any tax due.
(e) Operating Loss Carry Forward.
(1) Except where prohibited by the Ordinance, the portion of a net operating loss, based on income taxable under the Ordinance sustained in any taxable year subsequent to the effective date of the Ordinance and allocable to this Municipality, may be applied against the portion of the profit of succeeding year (s) allocable to this Municipality until exhausted, but in no event for more than five (5) taxable years. No portion of a net operating loss shall be carried back against net profits of any prior year. The loss must be applied to the profits on the same business activity.
(2) In the event net profits are allocated both within and without this Municipality, the portion of a net operating loss sustained shall be allocated to this Municipality in the same manner as provided herein for allocating net profits to this Municipality. The portion of a net operating loss to be carried forward shall be determined in the year the net operating loss is sustained on the basis of the allocation factors applicable to that year.
(3) In the case of fiscal years beginning prior to the effective date of the Ordinance, the net operating loss deduction will be that portion of the operating loss that the number of days of the fiscal year after the effective date of the Ordinance bears to the total number of days in such fiscal year, except when actual figures are available.
(4) A short taxable year (a fiscal year of less than twelve (12) months) shall be considered a full taxable year for purposes of this section.
(5) In any event in which a net operating loss deduction is claimed, a schedule should be attached showing:
A. Year in which net operating loss was sustained.
B. Method of accounting and allocation used to determine the portion of net operating loss allocable to this Municipality.
C. Amount of net operating loss used as a deduction in prior years.
D. Amount of net operating loss claimed as a deduction in current year.
(6) The net operating loss of a business which loses its identity through merger, consolidation, etc., shall not be allowed as a carry-forward loss deduction to the surviving business entity.
(7) In the case of net operating loss in the filing of a consolidated return, see Section 191.06(d).
(Ord. 152-94. Passed 12-19-94.)