Information Release

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).