by Raquel M. Mazarin
On March 15, 2023, Governor Mike DeWine signed legislation incorporating Internal Revenue Code (IRC) changes made since February 17, 2022, into Ohio income tax law, including changes occurring with the enactment of the Inflation Reduction Act of 2022 (PL 117-169, 8/16/2022) and the Consolidated Appropriations Act, 2023 (P.L. 117-328, 12/29/2022). (L. 2023, S10, effective 03/15/2023 unless otherwise stated; Ohio S10 Fiscal Note, 03/16/2023; Ohio Conformity Updates, Ohio Dept. of Tax’n., 03/16/2023; Notice Concerning Ohio Conformity and Federal Conformity Adjustments, Ohio Dept. of Tax’n., 03/16/2023.)
The legislation incorporates into Ohio tax law changes made to the IRC since February 17, 2022, including changes enacted by the Inflation Reduction Act of 2022 (Inflation Reduction Act) and the Consolidated Appropriations Act, 2023 (CAA, 2023) (i.e., effective March 15, 2023, Ohio incorporates all changes that have been made to the IRC and other federal laws taking effect after February 17, 2022). The incorporation applies to only general, updated references to the IRC or other federal laws and does not apply to references that specify a date. Since the starting point for determining Ohio adjusted gross income, Ohio taxable income, and other elements of the Ohio tax base is federal adjusted gross income (FAGI), the tax base for some Ohio taxpayers is materially affected by the Inflation Reduction Act and CAA, 2023 provisions that modify the definition of FAGI. According to the accompanying fiscal note to the bill, as passed by the House, regarding the Inflation Reduction Act changes, the ones with the most substantial impact on Ohio law are the extension of limitations on excess business losses and excess farm losses from January 1, 2027 to January 1, 2029 as well as an increase in the current maximum deduction per square foot for energy-efficient commercial buildings. Additionally, the most impactful changes in the CAA 2023 affecting Ohio law concern the tax treatment of retirement distributions and contributions. Some of the incorporated provisions include increasing the age of the required beginning date for mandatory retirement account distributions from 72 to 73 in 2023 and to age 75 in 2033; authorizing tax-free rollovers of up to $35,000 from 529 education savings plans to Roth individual retirement accounts; authorizing up to $1,000 withdrawals from tax-preferred retirement plans for certain emergency expenses without triggering the standard 10% penalty which would increase a taxpayer’s FAGI; and requiring automatic enrollment and yearly escalation of employee contributions into retirement plans started after December 29, 2022.
Alternative tax law election.
The legislation also revises Ohio tax law regarding an election available to taxpayers whenever federal amendments become incorporated. The legislation allows taxpayers with tax years ending after February 17, 2022 but before March 15, 2023, to irrevocably elect to apply to the taxpayer’s state tax calculation either: (1) the version of the IRC adopted by Ohio as of the end of the taxpayer’s taxable year; or (2) the version of the IRC as it existed after Ohio conformity was updated (i.e., effective March 15, 2023, Ohio incorporates all changes that have been made to the IRC and other federal laws taking effect after February 17, 2022). The election allows taxpayers to take advantage of relevant tax deductions/credits that become part of Ohio law after the close of the taxpayer’s tax year, while also avoiding retroactive tax increases. The Department specifies that taxpayers cannot selectively incorporate certain provisions from each version of the IRC, but rather must select one version of the IRC. The bill retains a provision specifying that similar elections made under prior versions of the law remain effective for the taxable years to which the previous elections applied.
Ohio Department of Taxation guidance.
Following the passage of S10, the Ohio Department of Taxation updated its conformity guidance to state that Ohio conforms with federal law as it existed on March 15, 2023, meaning Ohio is in conformity for tax years 2022 and prior. Because Ohio is now in conformity with federal law, income taxpayers and qualifying entities are not required to make any federal conformity adjustments on their tax year 2022 Ohio tax returns. However, this conformity does not relieve a taxpayer’s obligation associated with any tax item for which there is a specific Ohio law that directly decouples from the IRC, such as the addback and deduction of IRC § 168(k) and IRC § 179 depreciation expenses. Taxpayers can find a complete list of instances where Ohio law decouples from the IRC on the Ohio Schedule of Adjustments.
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