As Introduced

126th General Assembly Regular Session 2005-2006

H. B. No. 46

Representatives Schaffer, McGregor, Fessler, Taylor 

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A BILL

To amend section 5747.01 of the Revised Code to

1

increase tax-deductibility of unreimbursed medical

2

expenses and to expressly incorporate favorable

3

tax treatment of new health savings accounts.

4

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF OHIO:

Section 1. That section 5747.01 of the Revised Code be	5
amended to read as follows:	6

Sec. 5747.01.  Except as otherwise expressly provided or	7
clearly appearing from the context, any term used in this chapter	8
has the same meaning as when used in a comparable context in the	9
laws of the United States relating to federal income taxes. Any	10
reference in this chapter to the Internal Revenue Code includes	11
other laws of the United States relating to federal income taxes.	12

As used in this chapter:

13

(A) "Adjusted gross income" or "Ohio adjusted gross income"	14
means federal adjusted gross income, as defined and used in the	15
Internal Revenue Code, adjusted as provided in this section:	16

(1) Add interest or dividends on obligations or securities of	17
any state or of any political subdivision or authority of any	18
state, other than this state and its subdivisions and authorities.	19

(2) Add interest or dividends on obligations of any	20
authority, commission, instrumentality, territory, or possession	21
of the United States to the extent that the interest or dividends	22
are exempt from federal income taxes but not from state income	23
taxes.	24

(3) Deduct interest or dividends on obligations of the United	25
States and its territories and possessions or of any authority,	26
commission, or instrumentality of the United States to the extent	27
that the interest or dividends are included in federal adjusted	28
gross income but exempt from state income taxes under the laws of	29
the United States.	30

(4) Deduct disability and survivor's benefits to the extent	31
included in federal adjusted gross income.	32

(5) Deduct benefits under Title II of the Social Security Act	33
and tier 1 railroad retirement benefits to the extent included in	34
federal adjusted gross income under section 86 of the Internal	35
Revenue Code.	36

(6) In the case of a taxpayer who is a beneficiary of a trust	37
that makes an accumulation distribution as defined in section 665	38
of the Internal Revenue Code, add, for the beneficiary's taxable	39
years beginning before 2002 or after 2004, the portion, if any, of	40
such distribution that does not exceed the undistributed net	41
income of the trust for the three taxable years preceding the	42
taxable year in which the distribution is made to the extent that	43
the portion was not included in the trust's taxable income for any	44
of the trust's taxable years beginning in 2002, 2003, or 2004.	45
"Undistributed net income of a trust" means the taxable income of	46
the trust increased by (a)(i) the additions to adjusted gross	47
income required under division (A) of this section and (ii) the	48
personal exemptions allowed to the trust pursuant to section	49
642(b) of the Internal Revenue Code, and decreased by (b)(i) the	50
deductions to adjusted gross income required under division (A) of	51
this section, (ii) the amount of federal income taxes attributable	52
to such income, and (iii) the amount of taxable income that has	53
been included in the adjusted gross income of a beneficiary by	54
reason of a prior accumulation distribution. Any undistributed net	55
income included in the adjusted gross income of a beneficiary	56
shall reduce the undistributed net income of the trust commencing	57
with the earliest years of the accumulation period.	58

(7) Deduct the amount of wages and salaries, if any, not	59
otherwise allowable as a deduction but that would have been	60
allowable as a deduction in computing federal adjusted gross	61
income for the taxable year, had the targeted jobs credit allowed	62
and determined under sections 38, 51, and 52 of the Internal	63
Revenue Code not been in effect.	64

(8) Deduct any interest or interest equivalent on public	65
obligations and purchase obligations to the extent that the	66
interest or interest equivalent is included in federal adjusted	67
gross income.	68

(9) Add any loss or deduct any gain resulting from the sale,	69
exchange, or other disposition of public obligations to the extent	70
that the loss has been deducted or the gain has been included in	71
computing federal adjusted gross income.	72

(10) Deduct or add amounts, as provided under section 5747.70	73
of the Revised Code, related to contributions to variable college	74
savings program accounts made or tuition credits purchased	75
pursuant to Chapter 3334. of the Revised Code.	76

(11)(a) Deduct, to the extent not otherwise allowable as a	77
deduction or exclusion in computing federal or Ohio adjusted gross	78
income for the taxable year, the amount the taxpayer paid during	79
the taxable year for medical care insurance and qualified	80
long-term care insurance for the taxpayer, the taxpayer's spouse,	81
and dependents. No deduction for medical care insurance under	82
division (A)(11) of this section shall be allowed either to any	83
taxpayer who is eligible to participate in any subsidized health	84
plan maintained by any employer of the taxpayer or of the	85
taxpayer's spouse, or to any taxpayer who is entitled to, or on	86
application would be entitled to, benefits under part A of Title	87
XVIII of the "Social Security Act," 49 Stat. 620 (1935), 42 U.S.C.	88
301, as amended. For the purposes of division (A)(11)(a) of this	89
section, "subsidized health plan" means a health plan for which	90
the employer pays any portion of the plan's cost. The deduction	91
allowed under division (A)(11)(a) of this section shall be the net	92
of any related premium refunds, related premium reimbursements, or	93
related insurance premium dividends received during the taxable	94
year.	95

(b) Deduct, to the extent not otherwise deducted or excluded	96
in computing federal or Ohio adjusted gross income during the	97
taxable year, the amount the taxpayer paid during the taxable	98
year, not compensated for by any insurance or otherwise, for	99
medical care of the taxpayer, the taxpayer's spouse, and	100
dependents, to the extent the expenses exceed seven and one-half	101
five per cent of the taxpayer's federal adjusted gross income.	102

(c) For purposes of division (A)(11) of this section,	103
"medical care" has the meaning given in section 213 of the	104
Internal Revenue Code, subject to the special rules, limitations,	105
and exclusions set forth therein, and "qualified long-term care"	106
has the same meaning given in section 7702(B)(b) of the Internal	107
Revenue Code.	108

(12)(a) Deduct any amount included in federal adjusted gross	109
income solely because the amount represents a reimbursement or	110
refund of expenses that in any year the taxpayer had deducted as	111
an itemized deduction pursuant to section 63 of the Internal	112
Revenue Code and applicable United States department of the	113
treasury regulations. The deduction otherwise allowed under	114
division (A)(12)(a) of this section shall be reduced to the extent	115
the reimbursement is attributable to an amount the taxpayer	116
deducted under this section in any taxable year.	117

(b) Add any amount not otherwise included in Ohio adjusted	118
gross income for any taxable year to the extent that the amount is	119
attributable to the recovery during the taxable year of any amount	120
deducted or excluded in computing federal or Ohio adjusted gross	121
income in any taxable year.	122

(13) Deduct any portion of the deduction described in section	123
1341(a)(2) of the Internal Revenue Code, for repaying previously	124
reported income received under a claim of right, that meets both	125
of the following requirements:	126

(a) It is allowable for repayment of an item that was	127
included in the taxpayer's adjusted gross income for a prior	128
taxable year and did not qualify for a credit under division (A)	129
or (B) of section 5747.05 of the Revised Code for that year;	130

(b) It does not otherwise reduce the taxpayer's adjusted	131
gross income for the current or any other taxable year.	132

(14)(a) Deduct an amount equal to the deposits made to, and	133
net investment earnings of, a medical savings account during the	134
taxable year, in accordance with section 3924.66 of the Revised	135
Code. The deduction allowed by division (A)(14)(a) of this section	136
does not apply to medical savings account deposits and earnings	137
otherwise deducted or excluded for the current or any other	138
taxable year from the taxpayer's federal adjusted gross income.	139

(15)(a)(b) Add an amount equal to the funds withdrawn from a	140
medical savings account during the taxable year, and the net	141
investment earnings on those funds, when the funds withdrawn were	142
used for any purpose other than to reimburse an account holder	143
for, or to pay, eligible medical expenses, in accordance with	144
section 3924.66 of the Revised Code;	145

(b)(c) Add the amounts distributed from a medical savings	146
account under division (A)(2) of section 3924.68 of the Revised	147
Code during the taxable year.	148

(15)(a) Deduct an amount equal to the aggregate amount the	149
taxpayer paid in cash during the taxable year to a health savings	150
account of the taxpayer, to the extent the taxpayer is entitled to	151
deduct such an amount under section 223 of the Internal Revenue	152
Code and to the extent such amount is not otherwise deducted or	153
excluded for the current or any other taxable year from the	154
taxpayer's federal adjusted gross income.	155

(b) Add, to the extent not included in the taxpayer's federal	156
adjusted gross income, any amount paid or distributed from a	157
health savings account during the taxable year, and the net	158
investment earnings on that amount, that was not used exclusively	159
to pay qualified medical expenses of an account beneficiary,	160
including any amount treated as not used to pay qualified medical	161
expenses pursuant to section 223(e)(2) of the Internal Revenue	162
Code.	163

(16) Add any amount claimed as a credit under section	164
5747.059 of the Revised Code to the extent that such amount	165
satisfies either of the following:	166

(a) The amount was deducted or excluded from the computation	167
of the taxpayer's federal adjusted gross income as required to be	168
reported for the taxpayer's taxable year under the Internal	169
Revenue Code;	170

(b) The amount resulted in a reduction of the taxpayer's	171
federal adjusted gross income as required to be reported for any	172
of the taxpayer's taxable years under the Internal Revenue Code.	173

(17) Deduct the amount contributed by the taxpayer to an	174
individual development account program established by a county	175
department of job and family services pursuant to sections 329.11	176
to 329.14 of the Revised Code for the purpose of matching funds	177
deposited by program participants. On request of the tax	178
commissioner, the taxpayer shall provide any information that, in	179
the tax commissioner's opinion, is necessary to establish the	180
amount deducted under division (A)(17) of this section.	181

(18) Beginning in taxable year 2001, if the taxpayer is	182
married and files a joint return and the combined federal adjusted	183
gross income of the taxpayer and the taxpayer's spouse for the	184
taxable year does not exceed one hundred thousand dollars, or if	185
the taxpayer is single and has a federal adjusted gross income for	186
the taxable year not exceeding fifty thousand dollars, deduct	187
amounts paid during the taxable year for qualified tuition and	188
fees paid to an eligible institution for the taxpayer, the	189
taxpayer's spouse, or any dependent of the taxpayer, who is a	190
resident of this state and is enrolled in or attending a program	191
that culminates in a degree or diploma at an eligible institution.	192
The deduction may be claimed only to the extent that qualified	193
tuition and fees are not otherwise deducted or excluded for any	194
taxable year from federal or Ohio adjusted gross income. The	195
deduction may not be claimed for educational expenses for which	196
the taxpayer claims a credit under section 5747.27 of the Revised	197
Code.	198

(19) Add any reimbursement received during the taxable year	199
of any amount the taxpayer deducted under division (A)(18) of this	200
section in any previous taxable year to the extent the amount is	201
not otherwise included in Ohio adjusted gross income.	202

(20)(a)(i) Add five-sixths of the amount of depreciation	203
expense allowed by subsection (k) of section 168 of the Internal	204
Revenue Code, including the taxpayer's proportionate or	205
distributive share of the amount of depreciation expense allowed	206
by that subsection to a pass-through entity in which the taxpayer	207
has a direct or indirect ownership interest.	208

(ii) Add five-sixths of the amount of qualifying section 179	209
depreciation expense, including a person's proportionate or	210
distributive share of the amount of qualifying section 179	211
depreciation expense allowed to any pass-through entity in which	212
the person has a direct or indirect ownership. For the purposes of	213
this division, "qualifying section 179 depreciation expense" means	214
the difference between (I) the amount of depreciation expense	215
directly or indirectly allowed to the taxpayer under section 179	216
of the Internal Revenue Code, and (II) the amount of depreciation	217
expense directly or indirectly allowed to the taxpayer under	218
section 179 of the Internal Revenue Code as that section existed	219
on December 31, 2002.	220

The tax commissioner, under procedures established by the	221
commissioner, may waive the add-backs related to a pass-through	222
entity if the taxpayer owns, directly or indirectly, less than	223
five per cent of the pass-through entity.	224

(b) Nothing in division (A)(20) of this section shall be	225
construed to adjust or modify the adjusted basis of any asset.	226

(c) To the extent the add-back required under division	227
(A)(20)(a) of this section is attributable to property generating	228
nonbusiness income or loss allocated under section 5747.20 of the	229
Revised Code, the add-back shall be sitused to the same location	230
as the nonbusiness income or loss generated by the property for	231
the purpose of determining the credit under division (A) of	232
section 5747.05 of the Revised Code. Otherwise, the add-back shall	233
be apportioned, subject to one or more of the four alternative	234
methods of apportionment enumerated in section 5747.21 of the	235
Revised Code.	236

(d) For the purposes of division (A) of this section, net	237
operating loss carryback and carryforward shall not include	238
five-sixths of the allowance of any net operating loss deduction	239
carryback or carryforward to the taxable year to the extent such	240
loss resulted from depreciation allowed by section 168(k) of the	241
Internal Revenue Code and by the qualifying section 179	242
depreciation expense amount.	243

(21)(a) If the taxpayer was required to add an amount under	244
division (A)(20)(a) of this section for a taxable year, deduct	245
one-fifth of the amount so added for each of the five succeeding	246
taxable years.	247

(b) If the amount deducted under division (A)(21)(a) of this	248
section is attributable to an add-back allocated under division	249
(A)(20)(c) of this section, the amount deducted shall be sitused	250
to the same location. Otherwise, the add-back shall be apportioned	251
using the apportionment factors for the taxable year in which the	252
deduction is taken, subject to one or more of the four alternative	253
methods of apportionment enumerated in section 5747.21 of the	254
Revised Code.	255

(c) No deduction is available under division (A)(21)(a) of	256
this section with regard to any depreciation allowed by section	257
168(k) of the Internal Revenue Code and by the qualifying section	258
179 depreciation expense amount to the extent that such	259
depreciation resulted in or increased a federal net operating loss	260
carryback or carryforward to a taxable year to which division	261
(A)(20)(d) of this section does not apply.	262

(B) "Business income" means income, including gain or loss,	263
arising from transactions, activities, and sources in the regular	264
course of a trade or business and includes income, gain, or loss	265
from real property, tangible property, and intangible property if	266
the acquisition, rental, management, and disposition of the	267
property constitute integral parts of the regular course of a	268
trade or business operation. "Business income" includes income,	269
including gain or loss, from a partial or complete liquidation of	270
a business, including, but not limited to, gain or loss from the	271
sale or other disposition of goodwill.	272

(C) "Nonbusiness income" means all income other than business	273
income and may include, but is not limited to, compensation, rents	274
and royalties from real or tangible personal property, capital	275
gains, interest, dividends and distributions, patent or copyright	276
royalties, or lottery winnings, prizes, and awards.	277

(D) "Compensation" means any form of remuneration paid to an	278
employee for personal services.	279

(E) "Fiduciary" means a guardian, trustee, executor,	280
administrator, receiver, conservator, or any other person acting	281
in any fiduciary capacity for any individual, trust, or estate.	282

(F) "Fiscal year" means an accounting period of twelve months	283
ending on the last day of any month other than December.	284

(G) "Individual" means any natural person.

285

(H) "Internal Revenue Code" means the "Internal Revenue Code	286
of 1986," 100 Stat. 2085, 26 U.S.C.A. 1, as amended.	287

(I) "Resident" means any of the following, provided that	288
division (I)(3) of this section applies only to taxable years of a	289
trust beginning in 2002, 2003, or 2004:	290

(1) An individual who is domiciled in this state, subject to	291
section 5747.24 of the Revised Code;	292

(2) The estate of a decedent who at the time of death was	293
domiciled in this state. The domicile tests of section 5747.24 of	294
the Revised Code and any election under section 5747.25 of the	295
Revised Code are not controlling for purposes of division (I)(2)	296
of this section.	297

(3) A trust that, in whole or part, resides in this state. If	298
only part of a trust resides in this state, the trust is a	299
resident only with respect to that part.	300

For the purposes of division (I)(3) of this section:

301

(a) A trust resides in this state for the trust's current	302
taxable year to the extent, as described in division (I)(3)(d) of	303
this section, that the trust consists directly or indirectly, in	304
whole or in part, of assets, net of any related liabilities, that	305
were transferred, or caused to be transferred, directly or	306
indirectly, to the trust by any of the following:	307

(i) A person, a court, or a governmental entity or	308
instrumentality on account of the death of a decedent, but only if	309
the trust is described in division (I)(3)(e)(i) or (ii) of this	310
section;	311

(ii) A person who was domiciled in this state for the	312
purposes of this chapter when the person directly or indirectly	313
transferred assets to an irrevocable trust, but only if at least	314
one of the trust's qualifying beneficiaries is domiciled in this	315
state for the purposes of this chapter during all or some portion	316
of the trust's current taxable year;	317

(iii) A person who was domiciled in this state for the	318
purposes of this chapter when the trust document or instrument or	319
part of the trust document or instrument became irrevocable, but	320
only if at least one of the trust's qualifying beneficiaries is a	321
resident domiciled in this state for the purposes of this chapter	322
during all or some portion of the trust's current taxable year.	323

(b) A trust is irrevocable to the extent that the transferor	324
is not considered to be the owner of the net assets of the trust	325
under sections 671 to 678 of the Internal Revenue Code.	326

(c) With respect to a trust other than a charitable lead	327
trust, "qualifying beneficiary" has the same meaning as "potential	328
current beneficiary" as defined in section 1361(e)(2) of the	329
Internal Revenue Code, and with respect to a charitable lead trust	330
"qualifying beneficiary" is any current, future, or contingent	331
beneficiary, but with respect to any trust "qualifying	332
beneficiary" excludes a person or a governmental entity or	333
instrumentality to any of which a contribution would qualify for	334
the charitable deduction under section 170 of the Internal Revenue	335
Code.	336

(d) For the purposes of division (I)(3)(a) of this section,	337
the extent to which a trust consists directly or indirectly, in	338
whole or in part, of assets, net of any related liabilities, that	339
were transferred directly or indirectly, in whole or part, to the	340
trust by any of the sources enumerated in that division shall be	341
ascertained by multiplying the fair market value of the trust's	342
assets, net of related liabilities, by the qualifying ratio, which	343
shall be computed as follows:	344

(i) The first time the trust receives assets, the numerator	345
of the qualifying ratio is the fair market value of those assets	346
at that time, net of any related liabilities, from sources	347
enumerated in division (I)(3)(a) of this section. The denominator	348
of the qualifying ratio is the fair market value of all the	349
trust's assets at that time, net of any related liabilities.	350

(ii) Each subsequent time the trust receives assets, a	351
revised qualifying ratio shall be computed. The numerator of the	352
revised qualifying ratio is the sum of (1) the fair market value	353
of the trust's assets immediately prior to the subsequent	354
transfer, net of any related liabilities, multiplied by the	355
qualifying ratio last computed without regard to the subsequent	356
transfer, and (2) the fair market value of the subsequently	357
transferred assets at the time transferred, net of any related	358
liabilities, from sources enumerated in division (I)(3)(a) of this	359
section. The denominator of the revised qualifying ratio is the	360
fair market value of all the trust's assets immediately after the	361
subsequent transfer, net of any related liabilities.	362

(e) For the purposes of division (I)(3)(a)(i) of this	363
section:	364

(i) A trust is described in division (I)(3)(e)(i) of this	365
section if the trust is a testamentary trust and the testator of	366
that testamentary trust was domiciled in this state at the time of	367
the testator's death for purposes of the taxes levied under	368
Chapter 5731. of the Revised Code.	369

(ii) A trust is described in division (I)(3)(e)(ii) of this	370
section if the transfer is a qualifying transfer described in any	371
of divisions (I)(3)(f)(i) to (vi) of this section, the trust is an	372
irrevocable inter vivos trust, and at least one of the trust's	373
qualifying beneficiaries is domiciled in this state for purposes	374
of this chapter during all or some portion of the trust's current	375
taxable year.	376

(f) For the purposes of division (I)(3)(e)(ii) of this	377
section, a "qualifying transfer" is a transfer of assets, net of	378
any related liabilities, directly or indirectly to a trust, if the	379
transfer is described in any of the following:	380

(i) The transfer is made to a trust, created by the decedent	381
before the decedent's death and while the decedent was domiciled	382
in this state for the purposes of this chapter, and, prior to the	383
death of the decedent, the trust became irrevocable while the	384
decedent was domiciled in this state for the purposes of this	385
chapter.	386

(ii) The transfer is made to a trust to which the decedent,	387
prior to the decedent's death, had directly or indirectly	388
transferred assets, net of any related liabilities, while the	389
decedent was domiciled in this state for the purposes of this	390
chapter, and prior to the death of the decedent the trust became	391
irrevocable while the decedent was domiciled in this state for the	392
purposes of this chapter.	393

(iii) The transfer is made on account of a contractual	394
relationship existing directly or indirectly between the	395
transferor and either the decedent or the estate of the decedent	396
at any time prior to the date of the decedent's death, and the	397
decedent was domiciled in this state at the time of death for	398
purposes of the taxes levied under Chapter 5731. of the Revised	399
Code.	400

(iv) The transfer is made to a trust on account of a	401
contractual relationship existing directly or indirectly between	402
the transferor and another person who at the time of the	403
decedent's death was domiciled in this state for purposes of this	404
chapter.	405

(v) The transfer is made to a trust on account of the will of	406
a testator.	407

(vi) The transfer is made to a trust created by or caused to	408
be created by a court, and the trust was directly or indirectly	409
created in connection with or as a result of the death of an	410
individual who, for purposes of the taxes levied under Chapter	411
5731. of the Revised Code, was domiciled in this state at the time	412
of the individual's death.	413

(g) The tax commissioner may adopt rules to ascertain the	414
part of a trust residing in this state.	415

(J) "Nonresident" means an individual or estate that is not a	416
resident. An individual who is a resident for only part of a	417
taxable year is a nonresident for the remainder of that taxable	418
year.	419

(K) "Pass-through entity" has the same meaning as in section	420
5733.04 of the Revised Code.	421

(L) "Return" means the notifications and reports required to	422
be filed pursuant to this chapter for the purpose of reporting the	423
tax due and includes declarations of estimated tax when so	424
required.	425

(M) "Taxable year" means the calendar year or the taxpayer's	426
fiscal year ending during the calendar year, or fractional part	427
thereof, upon which the adjusted gross income is calculated	428
pursuant to this chapter.	429

(N) "Taxpayer" means any person subject to the tax imposed by	430
section 5747.02 of the Revised Code or any pass-through entity	431
that makes the election under division (D) of section 5747.08 of	432
the Revised Code.	433

(O) "Dependents" means dependents as defined in the Internal	434
Revenue Code and as claimed in the taxpayer's federal income tax	435
return for the taxable year or which the taxpayer would have been	436
permitted to claim had the taxpayer filed a federal income tax	437
return.	438

(P) "Principal county of employment" means, in the case of a	439
nonresident, the county within the state in which a taxpayer	440
performs services for an employer or, if those services are	441
performed in more than one county, the county in which the major	442
portion of the services are performed.	443

(Q) As used in sections 5747.50 to 5747.55 of the Revised	444
Code:	445

(1) "Subdivision" means any county, municipal corporation,	446
park district, or township.	447

(2) "Essential local government purposes" includes all	448
functions that any subdivision is required by general law to	449
exercise, including like functions that are exercised under a	450
charter adopted pursuant to the Ohio Constitution.	451

(R) "Overpayment" means any amount already paid that exceeds	452
the figure determined to be the correct amount of the tax.	453

(S) "Taxable income" or "Ohio taxable income" applies only to	454
estates and trusts, and means federal taxable income, as defined	455
and used in the Internal Revenue Code, adjusted as follows:	456

(1) Add interest or dividends, net of ordinary, necessary,	457
and reasonable expenses not deducted in computing federal taxable	458
income, on obligations or securities of any state or of any	459
political subdivision or authority of any state, other than this	460
state and its subdivisions and authorities, but only to the extent	461
that such net amount is not otherwise includible in Ohio taxable	462
income and is described in either division (S)(1)(a) or (b) of	463
this section:	464

(a) The net amount is not attributable to the S portion of an	465
electing small business trust and has not been distributed to	466
beneficiaries for the taxable year;	467

(b) The net amount is attributable to the S portion of an	468
electing small business trust for the taxable year.	469

(2) Add interest or dividends, net of ordinary, necessary,	470
and reasonable expenses not deducted in computing federal taxable	471
income, on obligations of any authority, commission,	472
instrumentality, territory, or possession of the United States to	473
the extent that the interest or dividends are exempt from federal	474
income taxes but not from state income taxes, but only to the	475
extent that such net amount is not otherwise includible in Ohio	476
taxable income and is described in either division (S)(1)(a) or	477
(b) of this section;	478

(3) Add the amount of personal exemption allowed to the	479
estate pursuant to section 642(b) of the Internal Revenue Code;	480

(4) Deduct interest or dividends, net of related expenses	481
deducted in computing federal taxable income, on obligations of	482
the United States and its territories and possessions or of any	483
authority, commission, or instrumentality of the United States to	484
the extent that the interest or dividends are exempt from state	485
taxes under the laws of the United States, but only to the extent	486
that such amount is included in federal taxable income and is	487
described in either division (S)(1)(a) or (b) of this section;	488

(5) Deduct the amount of wages and salaries, if any, not	489
otherwise allowable as a deduction but that would have been	490
allowable as a deduction in computing federal taxable income for	491
the taxable year, had the targeted jobs credit allowed under	492
sections 38, 51, and 52 of the Internal Revenue Code not been in	493
effect, but only to the extent such amount relates either to	494
income included in federal taxable income for the taxable year or	495
to income of the S portion of an electing small business trust for	496
the taxable year;	497

(6) Deduct any interest or interest equivalent, net of	498
related expenses deducted in computing federal taxable income, on	499
public obligations and purchase obligations, but only to the	500
extent that such net amount relates either to income included in	501
federal taxable income for the taxable year or to income of the S	502
portion of an electing small business trust for the taxable year;	503

(7) Add any loss or deduct any gain resulting from sale,	504
exchange, or other disposition of public obligations to the extent	505
that such loss has been deducted or such gain has been included in	506
computing either federal taxable income or income of the S portion	507
of an electing small business trust for the taxable year;	508

(8) Except in the case of the final return of an estate, add	509
any amount deducted by the taxpayer on both its Ohio estate tax	510
return pursuant to section 5731.14 of the Revised Code, and on its	511
federal income tax return in determining federal taxable income;	512

(9)(a) Deduct any amount included in federal taxable income	513
solely because the amount represents a reimbursement or refund of	514
expenses that in a previous year the decedent had deducted as an	515
itemized deduction pursuant to section 63 of the Internal Revenue	516
Code and applicable treasury regulations. The deduction otherwise	517
allowed under division (S)(9)(a) of this section shall be reduced	518
to the extent the reimbursement is attributable to an amount the	519
taxpayer or decedent deducted under this section in any taxable	520
year.	521

(b) Add any amount not otherwise included in Ohio taxable	522
income for any taxable year to the extent that the amount is	523
attributable to the recovery during the taxable year of any amount	524
deducted or excluded in computing federal or Ohio taxable income	525
in any taxable year, but only to the extent such amount has not	526
been distributed to beneficiaries for the taxable year.	527

(10) Deduct any portion of the deduction described in section	528
1341(a)(2) of the Internal Revenue Code, for repaying previously	529
reported income received under a claim of right, that meets both	530
of the following requirements:	531

(a) It is allowable for repayment of an item that was	532
included in the taxpayer's taxable income or the decedent's	533
adjusted gross income for a prior taxable year and did not qualify	534
for a credit under division (A) or (B) of section 5747.05 of the	535
Revised Code for that year.	536

(b) It does not otherwise reduce the taxpayer's taxable	537
income or the decedent's adjusted gross income for the current or	538
any other taxable year.	539

(11) Add any amount claimed as a credit under section	540
5747.059 of the Revised Code to the extent that the amount	541
satisfies either of the following:	542

(a) The amount was deducted or excluded from the computation	543
of the taxpayer's federal taxable income as required to be	544
reported for the taxpayer's taxable year under the Internal	545
Revenue Code;	546

(b) The amount resulted in a reduction in the taxpayer's	547
federal taxable income as required to be reported for any of the	548
taxpayer's taxable years under the Internal Revenue Code.	549

(12) Deduct any amount, net of related expenses deducted in	550
computing federal taxable income, that a trust is required to	551
report as farm income on its federal income tax return, but only	552
if the assets of the trust include at least ten acres of land	553
satisfying the definition of "land devoted exclusively to	554
agricultural use" under section 5713.30 of the Revised Code,	555
regardless of whether the land is valued for tax purposes as such	556
land under sections 5713.30 to 5713.38 of the Revised Code. If the	557
trust is a pass-though entity investor, section 5747.231 of the	558
Revised Code applies in ascertaining if the trust is eligible to	559
claim the deduction provided by division (S)(12) of this section	560
in connection with the pass-through entity's farm income.	561

Except for farm income attributable to the S portion of an	562
electing small business trust, the deduction provided by division	563
(S)(12) of this section is allowed only to the extent that the	564
trust has not distributed such farm income. Division (S)(12) of	565
this section applies only to taxable years of a trust beginning in	566
2002, 2003, or 2004.	567

(13) Add the net amount of income described in section 641(c)	568
of the Internal Revenue Code to the extent that amount is not	569
included in federal taxable income.	570

(14) Add or deduct the amount the taxpayer would be required	571
to add or deduct under division (A)(20) or (21) of this section if	572
the taxpayer's Ohio taxable income were computed in the same	573
manner as an individual's Ohio adjusted gross income is computed	574
under this section. In the case of a trust, division (S)(14) of	575
this section applies only to any of the trust's taxable years	576
beginning in 2002, 2003, or 2004.	577

(T) "School district income" and "school district income tax"	578
have the same meanings as in section 5748.01 of the Revised Code.	579

(U) As used in divisions (A)(8), (A)(9), (S)(6), and (S)(7)	580
of this section, "public obligations," "purchase obligations," and	581
"interest or interest equivalent" have the same meanings as in	582
section 5709.76 of the Revised Code.	583

(V) "Limited liability company" means any limited liability	584
company formed under Chapter 1705. of the Revised Code or under	585
the laws of any other state.	586

(W) "Pass-through entity investor" means any person who,	587
during any portion of a taxable year of a pass-through entity, is	588
a partner, member, shareholder, or equity investor in that	589
pass-through entity.	590

(X) "Banking day" has the same meaning as in section 1304.01	591
of the Revised Code.	592

(Y) "Month" means a calendar month.

593

(Z) "Quarter" means the first three months, the second three	594
months, the third three months, or the last three months of the	595
taxpayer's taxable year.	596

(AA)(1) "Eligible institution" means a state university or	597
state institution of higher education as defined in section	598
3345.011 of the Revised Code, or a private, nonprofit college,	599
university, or other post-secondary institution located in this	600
state that possesses a certificate of authorization issued by the	601
Ohio board of regents pursuant to Chapter 1713. of the Revised	602
Code or a certificate of registration issued by the state board of	603
career colleges and schools under Chapter 3332. of the Revised	604
Code.	605

(2) "Qualified tuition and fees" means tuition and fees	606
imposed by an eligible institution as a condition of enrollment or	607
attendance, not exceeding two thousand five hundred dollars in	608
each of the individual's first two years of post-secondary	609
education. If the individual is a part-time student, "qualified	610
tuition and fees" includes tuition and fees paid for the academic	611
equivalent of the first two years of post-secondary education	612
during a maximum of five taxable years, not exceeding a total of	613
five thousand dollars. "Qualified tuition and fees" does not	614
include:	615

(a) Expenses for any course or activity involving sports,	616
games, or hobbies unless the course or activity is part of the	617
individual's degree or diploma program;	618

(b) The cost of books, room and board, student activity fees,	619
athletic fees, insurance expenses, or other expenses unrelated to	620
the individual's academic course of instruction;	621

(c) Tuition, fees, or other expenses paid or reimbursed	622
through an employer, scholarship, grant in aid, or other	623
educational benefit program.	624

(BB)(1) "Modified business income" means the business income	625
included in a trust's Ohio taxable income after such taxable	626
income is first reduced by the qualifying trust amount, if any.	627

(2) "Qualifying trust amount" of a trust means capital gains	628
and losses from the sale, exchange, or other disposition of equity	629
or ownership interests in, or debt obligations of, a qualifying	630
investee to the extent included in the trust's Ohio taxable	631
income, but only if the following requirements are satisfied:	632

(a) The book value of the qualifying investee's physical	633
assets in this state and everywhere, as of the last day of the	634
qualifying investee's fiscal or calendar year ending immediately	635
prior to the date on which the trust recognizes the gain or loss,	636
is available to the trust.	637

(b) The requirements of section 5747.011 of the Revised Code	638
are satisfied for the trust's taxable year in which the trust	639
recognizes the gain or loss.	640

Any gain or loss that is not a qualifying trust amount is	641
modified business income, qualifying investment income, or	642
modified nonbusiness income, as the case may be.	643

(3) "Modified nonbusiness income" means a trust's Ohio	644
taxable income other than modified business income, other than the	645
qualifying trust amount, and other than qualifying investment	646
income, as defined in section 5747.012 of the Revised Code, to the	647
extent such qualifying investment income is not otherwise part of	648
modified business income.	649

(4) "Modified Ohio taxable income" applies only to trusts,	650
and means the sum of the amounts described in divisions (BB)(4)(a)	651
to (c) of this section:	652

(a) The fraction, calculated under section 5747.013, and	653
applying section 5747.231 of the Revised Code, multiplied by the	654
sum of the following amounts:	655

(i) The trust's modified business income;

656

(ii) The trust's qualifying investment income, as defined in	657
section 5747.012 of the Revised Code, but only to the extent the	658
qualifying investment income does not otherwise constitute	659
modified business income and does not otherwise constitute a	660
qualifying trust amount.	661

(b) The qualifying trust amount multiplied by a fraction, the	662
numerator of which is the sum of the book value of the qualifying	663
investee's physical assets in this state on the last day of the	664
qualifying investee's fiscal or calendar year ending immediately	665
prior to the day on which the trust recognizes the qualifying	666
trust amount, and the denominator of which is the sum of the book	667
value of the qualifying investee's total physical assets	668
everywhere on the last day of the qualifying investee's fiscal or	669
calendar year ending immediately prior to the day on which the	670
trust recognizes the qualifying trust amount. If, for a taxable	671
year, the trust recognizes a qualifying trust amount with respect	672
to more than one qualifying investee, the amount described in	673
division (BB)(4)(b) of this section shall equal the sum of the	674
products so computed for each such qualifying investee.	675

(c)(i) With respect to a trust or portion of a trust that is	676
a resident as ascertained in accordance with division (I)(3)(d) of	677
this section, its modified nonbusiness income.	678

(ii) With respect to a trust or portion of a trust that is	679
not a resident as ascertained in accordance with division	680
(I)(3)(d) of this section, the amount of its modified nonbusiness	681
income satisfying the descriptions in divisions (B)(2) to (5) of	682
section 5747.20 of the Revised Code.	683

If the allocation and apportionment of a trust's income under	684
divisions (BB)(4)(a) and (c) of this section do not fairly	685
represent the modified Ohio taxable income of the trust in this	686
state, the alternative methods described in division (C) of	687
section 5747.21 of the Revised Code may be applied in the manner	688
and to the same extent provided in that section.	689

(5)(a) Except as set forth in division (BB)(5)(b) of this	690
section, "qualifying investee" means a person in which a trust has	691
an equity or ownership interest, or a person or unit of government	692
the debt obligations of either of which are owned by a trust. For	693
the purposes of division (BB)(2)(a) of this section and for the	694
purpose of computing the fraction described in division (BB)(4)(b)	695
of this section, all of the following apply:	696

(i) If the qualifying investee is a member of a qualifying	697
controlled group on the last day of the qualifying investee's	698
fiscal or calendar year ending immediately prior to the date on	699
which the trust recognizes the gain or loss, then "qualifying	700
investee" includes all persons in the qualifying controlled group	701
on such last day.	702

(ii) If the qualifying investee, or if the qualifying	703
investee and any members of the qualifying controlled group of	704
which the qualifying investee is a member on the last day of the	705
qualifying investee's fiscal or calendar year ending immediately	706
prior to the date on which the trust recognizes the gain or loss,	707
separately or cumulatively own, directly or indirectly, on the	708
last day of the qualifying investee's fiscal or calendar year	709
ending immediately prior to the date on which the trust recognizes	710
the qualifying trust amount, more than fifty per cent of the	711
equity of a pass-through entity, then the qualifying investee and	712
the other members are deemed to own the proportionate share of the	713
pass-through entity's physical assets which the pass-through	714
entity directly or indirectly owns on the last day of the	715
pass-through entity's calendar or fiscal year ending within or	716
with the last day of the qualifying investee's fiscal or calendar	717
year ending immediately prior to the date on which the trust	718
recognizes the qualifying trust amount.	719

(iii) For the purposes of division (BB)(5)(a)(iii) of this	720
section, "upper level pass-through entity" means a pass-through	721
entity directly or indirectly owning any equity of another	722
pass-through entity, and "lower level pass-through entity" means	723
that other pass-through entity.	724

An upper level pass-through entity, whether or not it is also	725
a qualifying investee, is deemed to own, on the last day of the	726
upper level pass-through entity's calendar or fiscal year, the	727
proportionate share of the lower level pass-through entity's	728
physical assets that the lower level pass-through entity directly	729
or indirectly owns on the last day of the lower level pass-through	730
entity's calendar or fiscal year ending within or with the last	731
day of the upper level pass-through entity's fiscal or calendar	732
year. If the upper level pass-through entity directly and	733
indirectly owns less than fifty per cent of the equity of the	734
lower level pass-through entity on each day of the upper level	735
pass-through entity's calendar or fiscal year in which or with	736
which ends the calendar or fiscal year of the lower level	737
pass-through entity and if, based upon clear and convincing	738
evidence, complete information about the location and cost of the	739
physical assets of the lower pass-through entity is not available	740
to the upper level pass-through entity, then solely for purposes	741
of ascertaining if a gain or loss constitutes a qualifying trust	742
amount, the upper level pass-through entity shall be deemed as	743
owning no equity of the lower level pass-through entity for each	744
day during the upper level pass-through entity's calendar or	745
fiscal year in which or with which ends the lower level	746
pass-through entity's calendar or fiscal year. Nothing in division	747
(BB)(5)(a)(iii) of this section shall be construed to provide for	748
any deduction or exclusion in computing any trust's Ohio taxable	749
income.	750

(b) With respect to a trust that is not a resident for the	751
taxable year and with respect to a part of a trust that is not a	752
resident for the taxable year, "qualifying investee" for that	753
taxable year does not include a C corporation if both of the	754
following apply:	755

(i) During the taxable year the trust or part of the trust	756
recognizes a gain or loss from the sale, exchange, or other	757
disposition of equity or ownership interests in, or debt	758
obligations of, the C corporation.	759

(ii) Such gain or loss constitutes nonbusiness income.

760

(6) "Available" means information is such that a person is	761
able to learn of the information by the due date plus extensions,	762
if any, for filing the return for the taxable year in which the	763
trust recognizes the gain or loss.	764

(CC) "Qualifying controlled group" has the same meaning as in	765
section 5733.04 of the Revised Code.	766

(DD) "Related member" has the same meaning as in section	767
5733.042 of the Revised Code.	768

(EE) Any term used in this chapter that is not otherwise	769
defined in this section and that is not used in a comparable	770
context in the Internal Revenue Code and other statutes of the	771
United States relating to federal income taxes has the same	772
meaning as in section 5733.40 of the Revised Code.	773

Section 2. That existing section 5747.01 of the Revised Code	774
is hereby repealed.	775

Section 3. The amendment by this act of section 5747.01 of	776
the Revised Code applies to taxable years beginning on or after	777
January 1, 2005.	778