April 4, 2018 Ohio updates IRC conformity, affecting individual taxpayers On March 30, 2018, Governor John Kasich signed two pieces of legislation into law. The first, Sub. S.B. 22 (SB 22), updates Ohio's conformity to the Internal Revenue Code, which incorporate certain provisions of the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), affecting individual taxpayers. The second, Sub. H.B. 24 (HB 24), retroactively expands the individual income tax deduction for certain medical expenses. Both provisions were designated as emergency legislation and, as such, went into immediate effect upon Governor Kasich's signature. SB 22 — IRC conformity Ohio is a fixed conformity state with regard to its references to the Internal Revenue Code (IRC). SB 22 amended Ohio Rev. Code Section 5701.11(A)(1) to define the IRC to be the version in existence as of the effective date of the legislation, March 30, 2018. Ohio Rev. Code Section 5747.01(B)(1) allows a taxpayer with a tax year ending after March 30, 2017, and before March 30, 2018, to irrevocably elect to incorporate changes made to the IRC for that tax year but before the effective date. Taxpayers make the election by filing their Ohio returns incorporating those changes. TCJA implications Ohio Rev. Code Section 5747.01(A) adopts federal adjusted gross income as the starting point for computing Ohio taxable income. The changes to the computation of the federal income tax adopted by the TCJA will have Ohio individual income tax implications. The more important implications include: — IRC Section 199A — federal qualified business income deduction (the federal 20% deduction available for owners of pass-through entities engaged in qualified businesses). This provision is not incorporated into the Ohio computation of taxable income because IRC Section 62(a) provides that the IRC Section 199A deduction is not a deduction for federal adjusted gross income. Ohio, however, provides its own business income deduction for sole proprietors or owners of a pass-through entity. — IRC Sections 168(k), 179 — 100% bonus depreciation and immediate expensing. Ohio Rev. Code Section 5747.01(A)(20)(a) decouples from federal bonus depreciation and requires a taxpayer to add back 5/6 of the depreciation deduction otherwise permitted. The taxpayer then takes 1/5 of the disallowed amounts in each of the following five tax years. — IRC Section 163(j) limitations on the deduction business interest. SB 22 does not expressly decouple from this provision. The federal limitations on business interest deductibility were intended to offset the benefit provided by immediate expensing. Ohio's apparent adoption of these deductibility limitations may result in an unbalanced conformity given its decoupling from immediate expensing. — Limitations on net operating loss usage. The TCJA amends IRC Section 172 to limit the usage of losses incurred after December 31, 2017 to 80% of taxable income with an indefinite carryforward of unused losses. Ohio should conform to this limitation. — Expansion of IRC Section 529 plans. The TCJA provides that contributions to, and earnings from, a 529 plan may be used to pay private K-12 tuition expenses. Ohio should conform to these provisions.1 As the impact of the TCJA continues to be studied, further changes to Ohio's conformity, or lack thereof, could come in the future. EY will continue to monitor these developments. SB 24 — deduction for eligible subsidized health insurance premiums Former Ohio Rev. Code Section 5747.01(A)(11) allowed a deduction for premiums paid for unsubsidized health insurance plans and other medical care expenses exceeding 7.5% of the individual's Ohio adjusted gross income. Subsidized health insurance premiums were expressly excluded from the former provisions. Before 2017, however, the Ohio individual income tax returns and instructions did not conform to the law, so taxpayers were able to claim a deduction for subsidized health insurance premiums (subject to the 7.5% limitation previously noted). The Ohio Department of Taxation (Department) changed the 2017 IT 1140 and instructions to disallow the deduction. SB 24 retroactively amends Ohio Rev. Code Section 5747.01(A)(11) to allow for the deductibility of subsidized health insurance premiums for 2017. The Department announced that taxpayers who have already filed their 2017 returns may file amended returns if the expenses otherwise qualify for the deduction.2 ———————————————
——————————————— 1 These federal provisions are scheduled to sunset after 2025 and, absent legislative action otherwise, Ohio's conformity to those provisions would also sunset. 2 See this link. | |||||
| |||||
