Executive Summary:
Ohio House Bill 69 proposes significant amendments to the state’s tax laws, primarily focusing on the taxation of pass-through entities (PTEs) and related individual income tax provisions. The bill introduces detailed definitions and rules for calculating the “adjusted qualifying amount” for qualifying investors and beneficiaries of PTEs and trusts. It also modifies the definition of “Ohio adjusted gross income” for individuals, including provisions related to deducting business income and credits for taxes paid to other jurisdictions. The proposed changes aim to clarify the tax obligations of PTE investors and beneficiaries who are not Ohio residents and to refine the state’s income tax framework.
Main Themes and Important Ideas/Facts:
1. Taxation of Pass-Through Entities (Section 5733.40):
- Introduction of “Adjusted Qualifying Amount”: The bill defines a new term, “adjusted qualifying amount,” which serves as the basis for taxation related to qualifying pass-through entities and trusts. This amount is calculated as the sum of each qualifying investor’s distributive share or each qualifying beneficiary’s share of qualifying net income/gain, multiplied by an apportionment fraction.
- Quote: “‘Adjusted qualifying amount’ means either of the following: (a) The sum of each qualifying investor’s distributive share of the income, gain, expense, or loss of a qualifying pass-through entity…multiplied by the apportionment fraction… (b) The sum of each qualifying beneficiary’s share of the qualifying net income and qualifying net gain distributed by a qualifying trust…multiplied by the apportionment fraction…” (Lines 1-16)
- Exclusions from Adjusted Qualifying Amount: Certain amounts are explicitly excluded from the calculation, though the provided excerpt does not detail these exclusions fully.
- Quote: “(2) The sum shall exclude any amount which, pursuant to…” (Line 19)
- Disallowance of Losses in Related Member Transactions: The bill mandates increasing the profit or net income of a qualifying entity by disallowing most recognized losses from direct or indirect transactions with related members.
- Quote: “For the purposes of Chapters 5733. and 5747. of the Revised Code, the profit or net income of the qualifying entity shall be increased by disallowing all recognized losses…with respect to all direct or indirect transactions with one or more related members.” (Lines 35-43)
- Consideration of Add-Backs and Deductions: The adjusted qualifying amount calculation incorporates adjustments based on add-backs and deductions related to Section 5747.01 of the Revised Code, as if the qualifying entity were a taxpayer under that chapter.
- Quote: “…equal to the qualifying investor’s or qualifying beneficiary’s distributive or proportionate share of the amount that the qualifying entity would be required allowed to add or deduct under divisions (A)(17) and (18) division (A)(18) of section 5747.01 of the Revised Code if the qualifying entity were a taxpayer…” (Lines 53-62)
- Apportionment Fraction: The bill outlines different methods for calculating the apportionment fraction based on the type of qualifying entity (general PTE, financial institution PTE, or qualifying trust), often referencing existing sections of the Ohio Revised Code related to corporate franchise tax.
- Quote (for general PTE): “(1) With respect to a qualifying pass-through entity other than a qualifying pass-through entity described in division (B)(2) of this section or a qualifying trust, the fraction defined in division (B)(1) of section 5733.05 of the Revised Code as if the qualifying pass-through entity were a corporation subject to the tax imposed by section 5733.06 of the Revised Code…” (Lines 79-86)
- Quote (for qualifying trust): “(3) With respect to a qualifying trust, the fraction calculated pursuant to division (B)(2) of section 5733.05 of the Revised Code as if the qualifying trust were a corporation subject to the tax imposed by section 5733.06 of the Revised Code…” (Lines 92-97)
- Definitions of Key Terms: The bill provides extensive definitions for terms crucial to understanding these provisions, including “adjusted qualifying amount,” “qualifying beneficiary,” “qualifying investor,” “qualifying pass-through entity,” “qualifying net gain,” “qualifying trust,” and “related member.” The definition of “qualifying investor” notably includes several exceptions (Lines 125-226).
2. Amendments to Individual Income Tax (Section 5747.01):
- Reference to Federal Income Tax Laws: The bill maintains the connection to federal income tax laws, stating that undefined terms have the same meaning as in federal tax law.
- Quote: “Except as otherwise expressly provided or clearly appearing from the context, any term used in this chapter that is not otherwise defined in this section has the same meaning as when used in a comparable context in the laws of the United States relating to federal income taxes…” (Lines 297-304)
- Modifications to “Adjusted Gross Income”: The bill outlines numerous additions and deductions to federal adjusted gross income to arrive at “Ohio adjusted gross income.” These include adjustments related to interest and dividends from various obligations, gains and losses from public obligations, and contributions to certain funds.
- Examples of Adjustments: Adding interest on out-of-state obligations (Lines 311-315), deducting interest on US obligations (Lines 326-332), adding back previously deducted expenses related to related members under specific conditions (Lines 467-484), and allowing deductions for expenses related to organ donation (Lines 696-729).
- Definition of “Pass-Through Entity Investor”: The bill clarifies the definition of a “pass-through entity investor.”
- Quote: “(W) ‘Pass-through entity investor’ means any person who, during any portion of a taxable year of a pass-through entity, is a partner, member, shareholder, or equity investor in that pass-through entity.” (Lines 1394-1399)
- Definition of “Related Member”: The definition of “related member” aligns with Section 5733.042 of the Revised Code.
- Quote: “(CC) ‘Related member’ has the same meaning as in section 5733.042 of the Revised Code.” (Lines 1405-1407)
- Definition of “Taxable Business Income”: A definition for “taxable business income” for individuals is introduced, relating to the business income included in federal adjusted gross income less any authorized deductions.
- Quote: “(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.” (Lines 1453-1459)
3. Credits Against Income Tax Liability (Section 5747.05):
- Credit for Nonresident Taxpayers: Nonresident taxpayers are allowed a credit for the portion of their combined adjusted gross income and business income not allocable or apportionable to Ohio. This credit cannot exceed the total Ohio income tax due.
- Quote: “(A)(1) The amount of tax otherwise due under section 5747.02 of the Revised Code on such portion of the combined adjusted gross income and business income of any nonresident taxpayer that is not allocable or apportionable to this state pursuant to sections 5747.20 to 5747.23 of the Revised Code.” (Lines 1484-1491)
- Credit for Resident Taxpayers for Taxes Paid to Other Jurisdictions: Resident taxpayers are allowed a credit for income tax paid to other states or the District of Columbia on income also subject to Ohio tax. This credit also has limitations.
- Quote: “(B)(1) The tax commissioner may enter into an agreement with the taxing authorities of any state or of the District of Columbia…providing for a credit against the tax imposed by section 5747.02 of the Revised Code on such portion of the combined adjusted gross income and business income of a resident taxpayer that in another state or in the District of Columbia is subjected to an income tax.” (Lines 1493-1500)
- Quote: “(2) The amount of income tax liability to another state or the District of Columbia on the portion of the combined adjusted gross income and business income of a resident taxpayer that in another state or in the District of Columbia is subjected to an income tax.” (Lines 1500-1506)
- Treatment of Business Income Deduction in Credit Calculation: When calculating the credit for taxes paid to other jurisdictions, the business income deduction under Section 5747.01(A)(28) is applied first.
- Quote: “In computing a resident taxpayer’s income tax paid or accrued to another state or the District of Columbia, the deduction authorized by division (A)(28) of section 5747.01 of the Revised Code shall first be allocated and apportioned to such other state or the District of Columbia.” (Lines 1516-1521)
Repeal of Existing Sections:
The bill proposes the repeal of the existing versions of Sections 5733.40, 5747.01, and 5747.05 of the Revised Code, to be replaced by the amended versions outlined in the bill.
Composite Section:
The bill notes that the presented version of Section 5747.01 is a composite reflecting amendments from previous legislation (H.B. 101 and S.B. 154 of the 135th General Assembly), indicating an effort to harmonize prior changes with the new proposals.
Potential Implications:
- Increased Complexity: The introduction of detailed definitions and calculation rules for PTE taxation could increase the complexity of tax compliance for both PTEs and their investors/beneficiaries.
- Impact on Non-Resident Investors: The provisions related to the “adjusted qualifying amount” and the associated withholding tax (referenced but not detailed in this excerpt) will likely have a significant impact on non-resident investors in Ohio PTEs and beneficiaries of Ohio qualifying trusts.
- Refinement of Individual Income Tax: The numerous adjustments to “Ohio adjusted gross income” reflect ongoing efforts to align the state tax base with federal law while addressing specific state policy considerations.
- Interaction with Other Tax Provisions: The cross-references to other sections of the Ohio Revised Code (e.g., 5733.05, 5733.056, 5747.08, 5747.20) highlight the interconnectedness of these proposed changes with existing tax regulations.
Further Considerations:
A complete understanding of the implications of HB 69 requires analyzing the full text of the bill, including the sections that were not excerpted, and considering the potential impact on various types of taxpayers and businesses operating in or with connections to Ohio. The rules and regulations that the Tax Commissioner may adopt (as referenced in Section 5733.40(I)(8) and 5747.01(I)(3)(g)) will also be critical in interpreting and implementing these provisions.