Ohio Full Expensing | OBBBA Conformity

Ohio policymakers, like those in many other states, are currently addressing conformity to the Internal Revenue Code (IRC) after the passage of the One Big Beautiful Bill Act (OBBBA). Ohio is a static conformity state, meaning the state conforms to the federal taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. code as of a specific date. Therefore, if Congress changes federal tax laws, Ohio must adopt legislation to bring relevant changes into the state’s tax code.

Senate Bill 9—recently passed in the Ohio legislature—awaits Governor Mike DeWine’s signature to conform Ohio to federal tax changes made since March 7, 2025, Ohio’s current conformity date. This includes the OBBBA’s permanent restoration of immediate first-year expensing of domestic research and experimentation (R&E) expenditures under Section 174 of the IRC. (Notably, R&E is the IRC’s term for what is more generally referred to as research and development.)

Ohio levies a gross receipts taxGross receipts taxes are applied to a company’s gross sales, without deductions for a firm’s business expenses, like compensation, costs of goods sold, and overhead costs. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding.—the Commercial Activity Tax—instead of a traditional corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax., so while C corporations are unable to claim a traditional deduction for their R&E expenses, Ohio does conform to the IRC for individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source purposes. Thus, Ohio’s pass-through businesses will benefit from the state allowing R&E expensing rather than amortization.

During committee hearings on S.B. 9, the fiscal impact of conforming to the OBBBA’s changes to Section 174 became the center of significant discussion, so the merits of conforming to that provision are worth exploring.

Historical Tax Treatment of Research and Experimentation Expenses

From 1954 through 2021, corporations and pass-through businesses were permitted under federal law to immediately and fully deduct R&E expenditures in the year those costs were incurred. For 68 years, every state with a corporate income tax followed this federal treatment, and it was also standard practice for pass-through businesses under states’ individual income tax codes.

Like for other ordinary and necessary business expenses—such as wages, rent, and utilities—immediate deductibility for R&E expenses makes sense because business taxation should be based on net income, or revenues less expenses, and investment in R&E is fundamentally a cost of doing business. The decades-long allowance in the federal tax code (and historically in Ohio’s individual income tax code for pass-through businesses) of full deductibility for R&E expenses helped prevent innovators’ net profits from being overstated for income tax purposes.

The Tax Cuts and Jobs Act (TCJA) of 2017 changed this longstanding policy, requiring businesses to capitalize and amortize domestic R&E expenditures over five years, effective for tax years beginning after December 31, 2021. Notably, the TCJA’s drafters never intended this policy change to actually take effect; rather, it was designed as a cost savings mechanism to lower the cost of the TCJA toward the end of the 10-year budget window, with the idea that policymakers would later pass legislation to prevent the amortization requirement from taking effect. Given the longstanding federal policy of allowing first-year expensing for R&E, many lawmakers were surprised when the amortization requirement was permitted to take effect in 2022.

During the years in which the amortization policy was in effect, it was economically harmful to corporations, pass-through businesses, and startups heavily invested in innovation. That harm has been exacerbated further in states like Ohio that have remained conformed to the policy. Such a policy penalizes R&E by increasing the taxable income and reducing the cash flow of businesses involved in these activities compared to other categories of expenses that have remained fully and immediately deductible.

The OBBBA restored the immediate cost recoveryCost recovery refers to how the tax system permits businesses to recover the cost of investments through depreciation or amortization. Depreciation and amortization deductions affect taxable income, effective tax rates, and investment decisions. of domestic R&E expenses for tax years beginning after December 31, 2024. This restoration acknowledges that immediate cost recovery is an appropriate pro-growth tax policy that removes the previous tax penalty on investments in innovation and drives broader economic activity within the business community.

For states, conforming to the OBBBA’s restoration of immediate R&E cost recovery will result in a front-loaded “cost” in year one, but the costs will decrease in subsequent years. In year one, new immediate investments will be added to the amortized deductions from investments made in prior years. However, once previous assets finish their amortization schedules, any future investments will be deducted immediately with no additional lingering deductions. This is important because restoring business cash flow frees up resources for reinvestment. As businesses grow and become more profitable, the state’s tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. will ultimately expand.

Tax Bases Play a Large Role in Tax Competitiveness

Many states have viewed tax reform and relief as a means of growing their economies while becoming more competitive regionally and nationally. Ohio was among these states in 2023 when it decided to consolidate its individual income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. and begin the transition to a lower, single-rate tax.

While income tax rate reductions are a pro-growth tax reform, tax competitiveness is not based on tax rates alone. Overall tax structure matters, and conformity to the federal tax code’s business expensing provisions, like Section 174, allows businesses to reinvest in themselves as opposed to putting a tax penalty on capital investment. Research and experimentation have positive externalities. Businesses that innovate don’t just benefit themselves; there are spillover effects that benefit other businesses and the public more broadly. This, in turn, promotes long-term economic growth in the state.

Full ExpensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. Would Benefit Ohio’s Innovation Ecosystem

Ohio’s economy, like all states’ economies, draws upon the business activities of a wide array of industries. Notable industries in Ohio include health care, defense, and manufacturing.

According to the Ohio Department of Development, Ohio’s major hospital systems are among the state’s largest employers, representing 303,581 health sector workers. The Cleveland Clinic—one of the top-ranked hospitals in the world and home to numerous innovation centers—is the state’s largest employer with 63,641 employees.

Ohio’s health sector is more than a major employer and provider of healthcare services; it is the foundation of a fast‑growing life sciences innovation economy. The sector’s strength has fueled statewide investment in pharmaceutical research, medical device development, and biomedical engineering. The Ohio Life Sciences Association noted in a 2025 report that the state exceeds the national average in its patent activity in life science-related technology relative to its gross state product (GSP).

Ohio also has a longstanding legacy in aviation and defense innovation. While Orville and Wilbur Wright logged their first airplane flight in North Carolina, much of the research and experimentation that led to it occurred in Dayton, Ohio. After receiving their patent, the Wright brothers returned to Dayton and collaborated with the city’s Air Force base—now Wright-Patterson Air Force Base—to advance aviation research and manufacturing.

Today, Dayton remains a hub for aerospace and defense technology. While many of Wright-Patterson Air Force Base’s more than 33,000 workers are civilian and military personnel, private sector defense contracting is heavily relied upon for bridging the gap between the need for innovation and translating those innovations into national security capabilities. These firms employ thousands of engineers, information technology professionals, and supply chain experts, and smaller start-ups increasingly contribute to the innovation pipeline supporting the state’s larger companies.

Manufacturing is another significant economic driver for Ohio, with three of Ohio’s top five manufacturing employers headquartered in the state. Overall, approximately 693,000 Ohioans worked in manufacturing as of December 2025, representing 14 percent of Ohio’s private sector workforce.

According to the Ohio Manufacturing Association, every county in Ohio has at least one manufacturing establishment, with counties like Cuyahoga (Cleveland), Hamilton (Cincinnati), Franklin (Columbus), Summit (Akron), and Montgomery (Dayton) having over 500 establishments. In Shelby County, just north of Dayton, nearly half of all jobs (46.5 percent) are manufacturing jobs. Ohio is home to 5.3 percent of the nation’s manufacturing jobs, ranking third behind California (10.3 percent) and Texas (7.4 percent). Manufacturing is not just a major industry employing Ohioans; manufacturing enables the innovations pioneered in the state to be produced within the state.

While life sciences, defense, and manufacturing represent only a fraction of Ohio’s innovation-dependent industries, the interplay among these three sectors alone demonstrates why Ohio must foster continued investment in research and experimentation if it wants to lead in job creation, biomedical technology, national defense, and advanced manufacturing.

Final Thoughts

Key Ohio industry sectors depend on the ongoing research and experimentation fueled by pass-through businesses, including startups and smaller firms, in addition to large corporations. The state’s economy is directly affected by how the tax code treats these investments. While research and development tax credits are often included in state tax codes, they are often designed in a nonneutral manner that benefits some firms but not others, making full and immediate R&E expensing all the more important for smaller firms, startups, and other innovators that may not have access to targeted tax incentives. As such, conforming to the OBBBA’s full expensing for R&E expenditures under Section 174 is an important means of further improving Ohio’s competitive position as a leader in innovation.