IT 2004-02, CFT 2004-02
Income and Franchise Tax Updates, December, 2004
The purpose of this Information Release is to set forth
recent changes made to Ohio law and to clarify that (1)
Ohio’s reciprocity agreements with neighboring states do not
apply to certain nonresident owners of pass-through entities
and (2) certain enterprise zone benefits do not apply to Ohio
residents subject to Chapter 5747 of the Ohio Revised Code.
Recently-enacted Changes to the Internal Revenue Code
Apply for Ohio Tax Purposes
The amendments to Ohio Revised Code (R.C.) 5747.01 and
5733.04 enacted in late December 2004 by the Ohio General
Assembly in Sub. H.B. 362 make the recent changes to the
Internal Revenue Code applicable to the Ohio individual
fiduciary and income tax, the Ohio pass-through entity tax,
and the Ohio franchise tax. As a result, in determining an
Ohio tax taxpayers are not required to reverse the effects of
the recent changes to the Internal Revenue Code. For example,
in late 2004 the US Congress extended the educator expense
deduction which for federal income tax purposes had been
slated to expire at the end of 2003. Were it not for the
amendment to R.C. 5747.01, Ohio taxpayers claiming the
educator expense would have been required to increase their
federal adjusted gross income “starting point” on their Ohio
income tax returns by the educator expense amount claimed on
the federal income tax return. However, because of the Sub.
H.B. 362 amendment to R.C 5747.01, such taxpayers claiming
the educator expense deduction in computing federal adjusted
gross income do not have to add back the amount deducted in
computing Ohio taxable income.
As a result of the Ohio amendments to R.C. 5747.01 and
5733.04, Ohio taxpayers (individuals, pass-through entities,
estates, trusts, and franchise taxpayers) can ignore the
additions and deductions for “miscellaneous federal tax
adjustments” on the following Ohio tax forms which the
Department recently mailed to Ohio taxpayers:
- 2004 Ohio income tax form IT-1040, lines 31(a) and 43(d)
- 2004 Ohio form IT-4708, lines 31 and 39
- 2004 Ohio form IT-1140, schedule B, lines 2(a) and 2(b)
- 2004 Ohio form IT-1041, lines 27 and 35
- 2005 Ohio franchise tax form FT-1120, schedule B, lines
1(e) and 2(i)
Please note that the Ohio tax add-back and deduction for IRC
sections 168(k) and 179 depreciation adjustments remain in
effect in accordance with R.C. 5747.01 (A)(20), and (A)(21),
and R.C. 5733.04 (I)(17) and (I)(18).
In addition, Sub. H.B. 362 amended R.C. 5733.42 by
eliminating the “first come first serve” basis of
distributing the $20 million in available job training
credits for employers. The new law allows the Director of the
Ohio Department of Job and Family Services to adopt a rule
that establishes criteria and procedures for distribution of
the credit. For additional information on the credit and the
proposed rule please visit the Department of Job and Family
Services Web site at www.odjfs.state.oh.us/ottc/info/.
Ohio Tax Department Will Follow IRS Notice
2004-54.
IRS Notice 2004-54 provides for alternative
preparer-signature procedures for “paper” returns which paid
practitioners prepare on behalf of their clients. Paid
preparers may follow the same procedures with respect to the
following “paper” returns which paid preparers will prepare
on behalf of their clients: Ohio income tax returns, Ohio
withholding tax returns (employer and pass-through entity),
and Ohio corporation franchise tax reports. Statutory
authority for this is provided for by R.C. 5703.262(B) and
5747.08(F).
Reciprocity Agreements Do Not Apply to 20%+
Pass-Through Entity Owners
In 1997 the Ohio General Assembly enacted into Ohio law R.C.
5733.40(A) which states in relevant part as follows:
“For the purposes of Chapter 5733. [Ohio corporate franchise
tax] and 5747. [Ohio individual, estate, and trust income
tax] of the Revised Code, guaranteed payments or compensation
paid to investors by a qualifying entity [generally,
pass-through entities] . . . shall be considered a
distributive share of income of the qualifying entity.
Division (A)(7) of this section applies only to such payments
or such compensation paid to an in-vestor who at any time
during the qualifying entity’s tax year holds at least twenty
per cent direct or indirect interest in the profits or
capital of the qualifying entity.”
Because specific provisions of Ohio law, such as the
above-quoted law, override general provisions of Ohio law,
such as the references in R.C. 5747.05(A)(3) to reciprocity
agreements, then individuals who reside in any of the states
bordering Ohio and who directly or indirectly own at least
twenty per cent of a pass-through entity having nexus with
Ohio cannot claim the reciprocity agreement deduction;
rather, such individuals must treat guaranteed payments and
compensation as a distributive share of profit which must be
apportioned within and without Ohio for purposes of (i)
computing the nonresident credit on Ohio form IT-1040 and
(ii) computing Ohio taxable income on Ohio forms IT-1140 and
IT-4708. Statutory reference: R.C. 1.51.
Ohio Resident Individuals And Ohio Resident Estates
Are Not Eligible for Certain Enter-prise Zone
Benefits
R.C. 5709.65 provides for tax incentives to certain
enterprises receiving a tax incentive qualification
certificate from the Ohio Department of Development under
Ohio Revised Code section 5709.64. These incentives include
excluding from the numerator of the property factor and the
payroll factor certain amounts of Ohio property and Ohio
payroll, respectively “of a non-corporate enterprise under
division (B) of section 5747.21 of the Revised Code”.
R.C. 5747.21 applies in general to nonresidents in
apportioning business income for purposes of the nonresident
credit. R.C. 5747.21(A) states as follows:
“This section applies solely for the purposes of computing
the credit allowed under division (A) of section 5747.05 of
the Revised Code [nonresident credit], computing income
taxable in the state under division (D) of section 5747.08 of
the Revised Code [composite income tax return, form IT-4708],
and computing the credit allowed under section 5747.057 of
the Revised Code [export sales credit -- now expired].”
R.C. 5747.21 does not allow resident individuals or resident
estates to apportion income within and without Ohio, or to
make any adjustments to Ohio taxable income or to the tax
computed upon Ohio taxable income. Accordingly, Ohio resident
individuals that own an interest in an enterprise that holds
a tax incentive qualification certificate do not receive any
benefits with respect to the property and payroll factor
adjustments in R.C. 5709.65(A)(2) and (A)(3).