Ohio Ends Year With Flurry of Tax Bills That Include Update of Federal Conformity

by Ann Forster (RIA)

Notable provisions of four tax bills signed into law late in December are: moving the federal conformity date to December 24, 2007; authorizing a check-the-box mechanism on state and municipal income tax returns to allow tax administrators to communicate directly with a paid tax return preparer; creating a deduction for military retirement pay; creating a sales and use tax exemption for sales of property used or consumed in acquiring, formatting, editing, storing, and disseminating data or information by electronic publishing; prohibiting municipal corporations from requiring a taxpayer to file the annual income tax return before the taxpayer's federal income tax return filing date; allowing return preparers to use facsimile signatures on municipal returns; giving municipal corporations the option to permit self-employed taxpayers to deduct qualified amounts paid for medical care insurance; and giving municipal corporations the option to permit individuals to deduct amounts paid into health savings accounts. Unless otherwise stated, these provisions are effective December 24, 2007. ( L.2007, H157, generally eff. 12/24/2007 ; L.2007, H224, generally eff. 12/24/2007 ; L.2007, H24, generally eff. 12/24/2007 ; L.2007, H372, generally eff. 12/24/2007 .)

Federal conformity. Before the conformity update, a general reference in the tax title to the Internal Revenue Code (IRC) or other laws of the United States meant those laws as they existed on December 28, 2006. Now all changes to the IRC or other laws of the United States between December 28, 2006, and December 24, 2007, will be incorporated. For purposes of personal and corporate income tax (and the municipal income tax for electric companies) taxpayers have the option to irrevocably elect for a taxable year ending after December 28, 2006, but before December 24, 2007, to apply to the taxpayer's state tax calculation the federal tax laws that applied before that date. As in the past, filing a return without reversing changes, constitutes an irrevocable election.

Check-the-box—state income tax. The check-the-box mechanism provides an alternative to the current state income tax law which provides that Form TBOR 1, Declaration of Taxpayer Representation is the specific and exclusive means for taxpayers to authorize the Department to communicate with taxpayer representatives. Under the new law, the return or instructions accompanying the return will indicate that by checking the box the taxpayer authorizes the department of taxation to contact the preparer concerning questions that arise during the processing of the return and authorizes the preparer only to provide the department with information that is missing from the return, to contact the department for information about the processing of the return or the status of the taxpayer's refund or payments, and to respond to notices about mathematical errors, offsets, or return preparation that the taxpayer has received from the department and has shown to the preparer.

Military retirement pay. Taxpayers receiving retired military personnel pay may deduct that pay in computing their Ohio income tax liability. To be deductible, the pay must be for service in the United States Army, Navy, Air Force, Coast Guard, or Marine Corps or a reserve component thereof, or the National Guard. The retirement pay is deductible only to the extent it is included in the taxpayer's federal adjusted gross income (FAGI). If a taxpayer receives retirement pay under federal law that combines retired pay for both military service and federal civil service or federal employees retirement service, the taxpayer is entitled to deduct only the part of the retirement pay attributable to the military service, to the extent that part of such pay is included in FAGI and is not otherwise taken as an income tax deduction. The exemption applies to taxable years beginning on or after January 1, 2008.

Municipal income tax—deductions. Municipal corporations are now expressly permitted to adopt an ordinance or a resolution to allow sole proprietors to deduct from the net profit reported on Schedule C the amount the sole proprietor paid during the taxable year for medical care insurance premiums for the sole proprietor, a spouse, and dependents. The deduction would be allowed to the same extent health insurance premiums are deductible for federal income tax purposes. The municipal income tax deduction would be reduced by the amount of any related premium refunds, related premium reimbursements, or related insurance premium dividends received by the sole proprietor during the taxable year

An individual subject to the income tax of a municipal corporation that adopts an ordinance or resolution authorizing a health savings account (HSA) deduction would be able to deduct cash contributions to the HSA to the same extent contributions are deductible for federal income tax purposes. The federal tax-deductible amount is equal to the deductible under the high-deductible health plan, but is limited to a maximum annual dollar amount. The maximum annual dollar limit depends on whether the health plan covers only one person or covers two or more persons. These changes apply to taxable years beginning on or after January 1, 2008.

Publishing exemption. Electronic publishing is defined as access to one or more of the following primarily for business customers to conduct research: news; business, financial, legal, consumer, or credit materials; editorials, columns, reader commentary, or features; photos or images; archival or research material; legal notices, identity verification, or public records; scientific, educational, instructional, technical, professional, trade, or other literary materials; or other similar information which has been gathered and made available by the provider to the consumer in an electronic format. Providing electronic publishing includes the functions necessary for the acquisition, formatting, editing, storage, and dissemination of data or information that is the subject of a sale. Business customers include the federal government or a state government or a political subdivision.

All transactions by which electronic publishing service is provided to a business consumer will continue to be taxable except when transacted between members of an affiliated group. However, providers of electronic information services will no longer be eligible to receive a refund of 25% of the sales and use taxes they pay on purchases of computers, computer peripherals, software, telecommunications equipment, and similar property, primarily used to acquire, process, or store information for use by business customers or to transmit or disseminate the information to such customers, the services of installing or repairing such property, and agreements to repair or maintain such property.