HB 39: Amended Income Tax Definitions

Subject: Detailed Review of the Amended Section 5747.01 of the Ohio Revised Code as Proposed in House Bill 39 Source: Excerpts from Ohio House Bill 39 (As Introduced), detailing the proposed amendments to Section 5747.01 of the Revised Code.

Executive Summary:

This briefing document provides a detailed review of the proposed changes to Section 5747.01 of the Ohio Revised Code, which defines key terms related to Ohio’s individual income tax. The proposed amendments primarily focus on refining the definitions of “Adjusted gross income” or “Ohio adjusted gross income” by outlining numerous additions and deductions to the federal adjusted gross income. The bill also includes new definitions and modifications related to business income, nonbusiness income, residency for trusts, and introduces several specific deductions and additions related to various financial activities and circumstances. These changes will impact how individuals and certain entities calculate their Ohio taxable income.

Main Themes and Important Ideas/Facts:

The central theme of the proposed amendments to Section 5747.01 is the detailed specification of adjustments to federal adjusted gross income to arrive at “Ohio adjusted gross income.” This section acts as the foundational definitional framework for Ohio’s individual income tax system. Key aspects and changes include:

1. Definition of Adjusted Gross Income:

The bill explicitly states that “Adjusted gross income” or “Ohio adjusted gross income” begins with “federal adjusted gross income, as defined and used in the Internal Revenue Code, adjusted as provided in this section.” This underscores the reliance on the federal framework as a starting point.

2. Additions to Federal Adjusted Gross Income:

The bill mandates adding certain items back to federal adjusted gross income, including:

State and Political Subdivision Obligations: Interest or dividends on obligations of any state (other than Ohio) or its political subdivisions are added.
Quote: “(1) Add interest or dividends on obligations or securities of any state or of any political subdivision or authority of any state, other than this state and its subdivisions and authorities.”
Certain U.S. Government Obligations Exempt from Federal but not State Tax: Interest or dividends on obligations of U.S. authorities, commissions, etc., exempt from federal but not state income taxes.
Quote: “(2) Add interest or dividends on obligations of any authority, commission, instrumentality, territory, or possession of the United States to the extent that the interest or dividends are exempt from federal income taxes but not from state income taxes.”
Losses from Public Obligations: Any loss from the sale, exchange, or disposition of public obligations deducted in computing federal adjusted gross income.
Quote: “(8) Add any loss … resulting from the sale, exchange, or other disposition of public obligations to the extent that the loss has been deducted … in computing federal adjusted gross income.”
Withdrawals from Medical Savings Accounts for Non-Eligible Expenses: Funds withdrawn from medical savings accounts and related earnings used for purposes other than eligible medical expenses.
Quote: “(14)(a) Add an amount equal to the funds withdrawn from a medical savings account during the taxable year, and the net investment earnings on those funds, when the funds withdrawn were used for any purpose other than to reimburse an account holder for, or to pay, eligible medical expenses…”
Claimed Credits: Amounts claimed as a credit under Section 5747.059 that were already deducted or excluded from federal adjusted gross income.
Quote: “(15) Add any amount claimed as a credit under section 5747.059 of the Revised Code to the extent that such amount satisfies either of the following: (a) The amount was deducted or excluded from the computation of the taxpayer’s federal adjusted gross income as…”
Depreciation Add-Back (Section 168(k) and 179): A significant provision requiring the addition of five-sixths (or two-thirds under certain conditions) of the depreciation expense allowed under specific sections of the Internal Revenue Code. This aims to decouple Ohio’s tax treatment of certain accelerated depreciation.
Quote: “(17)(a)(i) Subject to divisions (A)(17)(a)(iii), (iv), and (v) of this section, add five-sixths of the amount of depreciation expense allowed by subsection (k) of section 168 of the Internal Revenue Code…” and “(ii) Subject to divisions (A)(17)(a)(iii), (iv), and (v) of this section, add five-sixths of the amount of qualifying section 179 depreciation expense…”
Funds Withdrawn from Homeownership Savings Accounts for Non-Eligible Expenses: If the taxpayer is the account owner, the amount of funds withdrawn not used for eligible expenses.
Quote: “(43) If the taxpayer is the account owner, add the amount of funds withdrawn from a homeownership savings account not used for eligible expenses, regardless of who deposited those funds.”

3. Deductions from Federal Adjusted Gross Income:

The bill outlines numerous deductions that can be subtracted from federal adjusted gross income to arrive at Ohio adjusted gross income, including:

U.S. Government Obligations: Interest or dividends on obligations of the U.S. government and its territories to the extent included in federal adjusted gross income but exempt from state income taxes.
Quote: “(3) Deduct interest or dividends on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent that the interest or dividends are included in federal adjusted gross income but exempt from state income taxes…”
Missed Federal Deductions Due to Work Opportunity Tax Credit: Wages and salaries that would have been deductible for federal purposes if the work opportunity tax credit were not in effect.
Quote: “(6) Deduct the amount of wages and salaries, if any, not otherwise allowable as a deduction but that would have been allowable as a deduction in computing federal adjusted gross income for the taxable year, had the work opportunity tax credit allowed and determined under sections 38, 51, and 52 of the Internal Revenue Code not been in effect.”
Interest on Public Obligations: Interest or interest equivalent on public obligations included in federal adjusted gross income.
Quote: “(7) Deduct any interest or interest equivalent on public obligations and purchase obligations to the extent that the interest or interest equivalent is included in federal adjusted gross income.”
Gains from Public Obligations: Any gain from the sale, exchange, or disposition of public obligations included in federal adjusted gross income.
Quote: “(8) … deduct any gain resulting from the sale, exchange, or other disposition of public obligations to the extent that the gain has been included in computing federal adjusted gross income.”
Qualified Tuition Program Contributions/Purchases: Amounts related to contributions to or tuition units purchased under a qualified tuition program, as provided under Section 5747.70.
Quote: “(9) Deduct or add amounts, as provided under section 5747.70 of the Revised Code, related to contributions made to or tuition units purchased under a qualified tuition program…”
Certain Healthcare Benefits: The cost of a subsidized health plan maintained by an employer of the taxpayer or spouse, or for taxpayers entitled to Medicare Part A benefits.
Quote: “(10)(a) Deduct the amount paid during the taxable year for insurance for medical care, including basic and hospital insurance, surgical insurance, major medical insurance, or other comparable insurance protection against the cost of medical care, for the taxpayer, the taxpayer’s spouse, and dependents. No deduction shall be allowed under division (A)(10)(a) of this section to any taxpayer who is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the taxpayer’s spouse, or to any taxpayer who is entitled to, or on application would be entitled to, benefits under part A of Title XVIII of the ‘Social Security Act’…”
Reimbursement of Previously Itemized Deductions: Amounts included in federal adjusted gross income solely as a reimbursement or refund of expenses itemized and deducted in a prior year.
Quote: “(11)(a) Deduct any amount included in federal adjusted gross income solely because the amount represents a reimbursement or refund of expenses that in any year the taxpayer had deducted as an itemized deduction pursuant to section 63 of the Internal Revenue Code…”
Repayment of Items Included in Prior Income: Amounts paid to the extent the item was included in prior taxable income and did not qualify for a credit.
Quote: “(12)(a) Deduct an amount equal to the portion, if any, of the amount paid by the taxpayer during the taxable year to repay unemployment compensation benefits received by the taxpayer during a prior taxable year and included in the taxpayer’s adjusted gross income for that prior taxable year and did not qualify for a credit under division (A) or (B) of section 5747.05 of the Revised Code for that year…”
Medical Savings Account Deposits and Earnings: Deposits made to and net investment earnings of a medical savings account.
Quote: “(13) Deduct an amount equal to the deposits made to, and net investment earnings of, a medical savings account during the taxable year, in accordance with section 3924.66 of the Revised Code…”
Depreciation Deduction Carryforward: A deduction related to the depreciation add-back from previous years, allowing for a gradual deduction of the previously added amount over several succeeding taxable years.
Quote: “(18)(a) If the taxpayer was required to add an amount under division (A)(17)(a) of this section for a taxable year, deduct one of the following: (i) One-fifth of the amount so added for each of the five succeeding taxable years…”
Ohio College Savings Program Deductions: Contributions to the Ohio College Savings Program under Section 5919.33.
Quote: “(20) Deduct the amount of contributions made pursuant to section 5919.33 of the Revised Code.”
Military Pay and Allowances: Military pay and allowances for active duty service, excluding amounts received while stationed in Ohio.
Quote: “(21) Deduct, to the extent included in federal adjusted gross income and not otherwise allowable as a deduction or exclusion… military pay and allowances received by the taxpayer during the taxable year for active duty service…”
Qualified Organ Donation Expenses: Certain unreimbursed expenses related to organ donation, up to $10,000, allowed once per taxpayer.
Quote: “(22) Deduct, to the extent not otherwise allowable as a deduction or exclusion… the amount of qualified organ donation expenses incurred by the taxpayer during the taxable year, not to exceed ten thousand dollars.”
Retirement Income Attributable to Uniformed Service: A deduction for retirement income attributable to the taxpayer’s uniformed service.
Quote: “(23) Deduct the amount of retirement income, as defined in division (A)(23)(b) of this section, that is received by the taxpayer during the taxable year…”
Tuition Paid to Own Dependent in Nonpublic School: Up to $10,000 per dependent, with a maximum of $40,000 per taxpayer.
Quote: “(24) Deduct the amount paid by the taxpayer during the taxable year for tuition to a public or nonpublic primary or secondary school for the taxpayer’s dependent…”
Scholarships, Grants, and Fellowships: Certain scholarships, grants, and fellowships not otherwise deducted or excluded from federal adjusted gross income.
Quote: “(27) Deduct the amount of any scholarship, grant, or fellowship received by the taxpayer to the extent the amount was included in the taxpayer’s federal adjusted gross income and not otherwise deducted or excluded…”
Business Income Deduction: A deduction of $125,000 for each spouse filing separately or $250,000 for all other individuals from the portion of federal adjusted gross income that is business income.
Quote: “(28) Deduct from the portion of an individual’s federal adjusted gross income that is business income… one hundred twenty-five thousand dollars for each spouse if spouses file separate returns… or two hundred fifty thousand dollars for all other individuals.”
ABLE Savings Account Contributions: Contributions to ABLE savings accounts.
Quote: “(29) Deduct, as provided under section 5747.78 of the Revised Code, contributions to ABLE savings accounts…”
Disaster Work Deduction: Income from disaster work performed in Ohio pursuant to a qualifying solicitation.
Quote: “(30)(a) Deduct, to the extent included in federal adjusted gross income and not otherwise deducted or excluded… the amount of income earned by the taxpayer during a disaster response period for disaster work performed in this state…”
Disability Severance Payment: Amounts received as a disability severance payment from the armed forces.
Quote: “(32) Deduct, to the extent not otherwise deducted or excluded… amounts received by the taxpayer as a disability severance payment, computed under 10 U.S.C. 1212…”
Ohio First-Time Homebuyer Savings Account Deduction: Contributions to a first-time homebuyer savings account.
Quote: “(33) Deduct, to the extent not otherwise deducted or excluded… the amount of contributions made to a first-time homebuyer savings account…”
Qualified Adoption Expenses: Certain qualified adoption expenses, up to $10,000 per child.
Quote: “(34) Deduct, to the extent not otherwise deducted or excluded… the amount of qualified adoption expenses, not to exceed ten thousand dollars per child…”
Capital Gain from Ohio Venture Capital Operating Companies: A deduction for capital gains from qualifying interests in Ohio venture capital operating companies, with different percentages based on the investment location. This deduction is effective for taxable years beginning in or after 2026.
Quote: “(35)(a) For taxable years beginning in or after 2026, deduct, to the extent not otherwise deducted or excluded…: (i) One hundred per cent of the capital gain received by the taxpayer… from a qualifying interest in an Ohio venture capital operating company attributable to the company’s investments in Ohio businesses…; and (ii) Fifty per cent of the capital gain received by the taxpayer… from a qualifying interest in an Ohio venture capital operating company attributable to the company’s investments in all other businesses…”
Qualified Investment in a Certified Ohio Venture Capital Fund: Amounts invested in a certified Ohio venture capital fund.
Quote: “(36) Deduct the amount of the taxpayer’s qualified investment in a certified Ohio venture capital fund…”
Expenses Related to Railroad Derailments: Certain expenses related to a railroad derailment occurring in Ohio and involving hazardous materials.
Quote: “(41) Deduct, to the extent not otherwise deducted or excluded… the amount of unreimbursed expenses incurred by the taxpayer in connection with a railroad derailment that occurred in this state and involved the release of hazardous materials…”
Homeownership Savings Account Contributions: Amounts contributed to a homeownership savings account.
Quote: “(42) Deduct amounts contributed to a homeownership savings account and calculated pursuant to divisions (B) and (C) of section 5747.85 of the Revised Code.”
Overtime Wages Paid: For the first taxable year ending after the effective date and the following seven years, overtime wages paid under specific labor laws, to the extent not otherwise deducted.
Quote: “(44) Deduct, for the first taxable year ending after the effective date of this amendment and for each of the following seven taxable years, overtime wages paid in accordance with section 4111.03 of the Revised Code or 29 U.S.C. 207, but only to the extent not otherwise deducted or excluded…”

4. Definitions of Business and Nonbusiness Income:

The bill provides detailed definitions for “Business income” and “Nonbusiness income,” crucial for determining how income is allocated and taxed, particularly for multi-state taxpayers.
“Business income” is defined as income arising from transactions in the regular course of a trade or business, including income from real, tangible, and intangible property if their acquisition, rental, management, and disposition are integral to the business. It also includes income from business liquidation and the sale of equity interests under certain conditions.
“Nonbusiness income” is defined as all income other than business income, including compensation, rents, royalties, capital gains, interest, dividends, lottery winnings, etc.

5. Definition of Resident Trusts:

The bill provides a detailed and complex definition of when a trust is considered a resident of Ohio for income tax purposes. This definition hinges on the domicile of the transferor, the irrevocability of the trust, and the domicile of the qualifying beneficiaries. It also includes a “qualifying ratio” to determine the extent to which a trust consists of assets from Ohio sources.
Quote: “(I)(3) A trust that, in whole or part, resides in this state. If only part of a trust resides in this state, the trust is a resident only with respect to that part.” The subsequent subsections (a) through (g) provide the detailed criteria for determining residency.

6. Treatment of Estates and Trusts:

The bill includes a separate subsection (S) that defines “Ohio taxable income” specifically for estates. This section outlines additions and deductions to federal taxable income for estates, mirroring some of the adjustments for individual adjusted gross income but with specific provisions relevant to estates (e.g., treatment of personal exemptions and estate tax deductions).

7. New Definitions:

The bill introduces definitions for several new terms, including “Taxable business income,” “Modified adjusted gross income,” and “Qualifying Ohio educator,” reflecting new deductions or specific taxpayer categories addressed in the amendments.
Quote for “Taxable business income”: “(GG) ‘Taxable business income’ means the amount by which an individual’s business income that is included in federal adjusted gross income exceeds the amount of business income the individual is authorized to deduct under division (A)(28) of this section for the taxable year.”
Quote for “Modified adjusted gross income”: “(II) ‘Modified adjusted gross income’ means Ohio adjusted gross income plus any amount deducted under divisions (A)(28) and , (34), and (44) of this section for the taxable year.”
Quote for “Qualifying Ohio educator”: “(JJ) ‘Qualifying Ohio educator’ means an individual who, for a taxable year, qualifies as an eligible educator, as that term is defined in section 62 of the Internal Revenue Code, and who holds a certificate, license, or permit described in Chapter 3319. or section 3301.071 of the Revised Code.”

8. Effective Date and Composite Section:

Section 3 of the bill specifies that the amendments to Section 5747.01 apply to taxable years ending on or after the effective date of this section.
Section 4 clarifies that the presented version of Section 5747.01 is a composite, harmonizing amendments from previous House Bill 101 and Senate Bill 154 of the 135th General Assembly.

Implications:

These proposed amendments will significantly alter the calculation of Ohio individual income tax liability by introducing numerous specific additions and deductions. Taxpayers and tax professionals will need to carefully review these changes to ensure accurate reporting. The complexity of the trust residency definition and the depreciation add-back/deduction provisions are particularly noteworthy. The introduction of new deductions and the refinement of income definitions will also have varied impacts on different taxpayer segments.

Further Considerations:

The fiscal impact of these proposed changes will need to be analyzed.
Guidance from the Ohio Department of Taxation will be crucial for taxpayers to understand and comply with these new provisions.
The interplay between these changes and other sections of the Ohio Revised Code related to income tax will need to be considered.

This briefing document provides a comprehensive overview of the proposed amendments to Section 5747.01. Further analysis may be required to fully understand the practical and economic consequences of these changes.

HB 39: Amended Income Tax Definitions

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