Candice Horbacz
Ohio policymakers are currently navigating the complex landscape of tax conformity, specifically addressing alignment with the Internal Revenue Code (IRC) following the recent passage of the federal One Big Beautiful Bill Act (OBBBA). As a static conformity state, Ohio adheres to the federal tax code as of a predetermined date, meaning any modifications to federal tax laws by Congress necessitate explicit legislative action within Ohio to incorporate these changes into the state’s own tax framework. This legislative synchronicity is crucial for maintaining clarity and predictability for businesses operating within the state.
The immediate focus of this legislative effort is Senate Bill 9 (S.B. 9), which recently cleared both chambers of the Ohio legislature and now awaits Governor Mike DeWine’s signature. The bill aims to update Ohio’s conformity date from March 7, 2025, to encompass federal tax changes enacted since that time. Crucially, this includes the Bipartisan Tax Relief and American Families Act of 2024, commonly referred to as the One Big Beautiful Bill Act (OBBBA), which permanently reinstated the immediate first-year expensing of domestic research and experimentation (R&E) expenditures under Section 174 of the IRC. For clarification, R&E is the federal tax code’s designation for what is more broadly recognized as research and development (R&D). The prompt action on S.B. 9 underscores the state’s recognition of the urgency in aligning with federal tax policy to prevent undue burdens on its innovative industries.
Unlike many states that levy a traditional corporate income tax, Ohio employs a Commercial Activity Tax (CAT), which is a gross receipts tax. This distinction means that C corporations in Ohio are not able to claim a traditional deduction for their R&E expenses in the same manner as states with corporate income taxes. However, Ohio does conform to the IRC for individual income tax purposes. Consequently, the provisions of S.B. 9 will primarily benefit Ohio’s extensive network of pass-through businesses – including S corporations, partnerships, and sole proprietorships – by allowing them to immediately expense R&E costs rather than amortizing them over several years. This is a significant advantage, particularly for startups and smaller innovative firms that rely heavily on immediate cash flow.
The fiscal implications of conforming to the OBBBA’s changes to Section 174 sparked considerable debate during committee hearings on S.B. 9. Lawmakers and stakeholders engaged in extensive discussions, highlighting the perceived "cost" to the state budget in the short term versus the long-term economic benefits. Understanding the historical context of R&E tax treatment is essential to appreciating the significance of this policy shift and the arguments surrounding it.
Historical Trajectory of Research and Experimentation Expense Treatment
For nearly seven decades, from 1954 through 2021, federal law permitted both corporations and pass-through businesses to immediately and fully deduct their R&E expenditures in the year these costs were incurred. This policy was widely adopted by states, with virtually every state that levied a corporate income tax mirroring this federal treatment. Similarly, states’ individual income tax codes, including Ohio’s for pass-through entities, typically allowed full deductibility for R&E expenses. This long-standing approach was rooted in sound economic principles.
The rationale behind immediate deductibility for R&E expenses parallels that of other ordinary and necessary business expenses such as wages, rent, and utilities. Business taxation is fundamentally based on net income – revenues minus expenses. Investment in R&E is a core cost of doing business, essential for innovation, product development, and maintaining competitiveness. Allowing full deductibility prevented the overstatement of innovators’ net profits for income tax purposes, ensuring a more accurate reflection of their taxable income. This policy, in essence, acknowledged that R&D is not merely an investment to be capitalized but an ongoing operational cost vital for growth.
A significant shift occurred with the passage of the Tax Cuts and Jobs Act (TCJA) in 2017. The TCJA mandated that businesses capitalize and amortize domestic R&E expenditures over five years, a policy that took effect for tax years beginning after December 31, 2021. This change was highly controversial, not least because many of the TCJA’s drafters reportedly never intended for this policy to actually be implemented. Instead, it was conceived as a budgetary mechanism, a "pay-for" to reduce the projected cost of the TCJA towards the end of its 10-year budget window. The prevailing expectation among policymakers was that subsequent legislation would be passed to prevent the amortization requirement from ever taking effect. Consequently, many lawmakers and businesses alike were taken by surprise when the amortization requirement was allowed to become law in 2022, marking a dramatic departure from decades of established tax policy.
The period during which the amortization policy was in effect proved economically detrimental, particularly for corporations, pass-through businesses, and emerging startups heavily invested in innovation. This harm was exacerbated in states like Ohio that remained conformed to the federal policy. Requiring amortization rather than immediate expensing effectively penalized R&E by artificially increasing the taxable income of businesses engaged in these activities. It also significantly reduced their immediate cash flow compared to other categories of expenses that continued to be fully and immediately deductible. Businesses found themselves paying taxes on income that had already been reinvested in future growth, hindering their ability to innovate and expand. According to a 2023 analysis by the National Association of Manufacturers, the R&D amortization requirement alone led to an average tax increase of 15% for affected businesses, with some reporting much higher impacts, thereby stifling investment and job creation.
The recent federal legislative action, the OBBBA, rectified this situation by restoring the immediate cost recovery of domestic R&E expenses for tax years beginning after December 31, 2024. This restoration represents a broad recognition that immediate cost recovery is a pro-growth tax policy. It eliminates the previous tax penalty on investments in innovation, thereby stimulating broader economic activity and fostering a more robust business environment. This bipartisan effort at the federal level reflects a consensus that fostering innovation is critical for national economic strength.
For states like Ohio, conforming to the OBBBA’s restoration of immediate R&E cost recovery entails a dynamic fiscal impact. In the initial year of conformity, there will be a front-loaded "cost" to the state budget. This is because new immediate investments will be added to the amortized deductions from investments made in prior years, creating a larger pool of deductions. However, this initial dip is temporary. Once the amortization schedules for previous assets are completed, any future R&E investments will be deducted immediately without additional lingering deductions from past years. This shift is vital for restoring business cash flow, freeing up resources for further reinvestment in R&D, capital improvements, and job creation. As businesses grow and become more profitable due to these incentives, the state’s tax base will ultimately expand, leading to increased revenue generation in the long term. Economic models from organizations like the Tax Foundation often project that while initial revenue impacts may appear negative, the dynamic effects of increased investment and economic activity ultimately lead to a larger, more resilient tax base.
Tax Bases and the Imperative of Tax Competitiveness
States increasingly recognize that a competitive tax environment is crucial for fostering economic growth and attracting investment. Many states, including Ohio, have strategically pursued tax reform and relief as a means to enhance their regional and national competitiveness. In 2023, Ohio exemplified this commitment by consolidating its individual income tax brackets and initiating a transition toward a lower, single-rate tax structure, a move often lauded by economic development experts as a significant step towards improved competitiveness.
However, tax competitiveness is not solely determined by tax rates. The overall tax structure, particularly its treatment of business expenses and investments, plays an equally critical role. Conformity to federal tax code provisions related to business expensing, such as Section 174, allows businesses to reinvest their earnings directly into their operations rather than penalizing capital investment through delayed cost recovery. Research and experimentation inherently generate positive externalities; the benefits of innovation extend beyond the innovating firm, creating spillover effects that benefit other businesses, industries, and the public at large. This dynamic interaction promotes long-term economic growth and enhances the overall prosperity of the state. States that offer more favorable R&E expensing policies are often more attractive to high-tech companies and startups.
Full Expensing: A Catalyst for Ohio’s Innovation Ecosystem
Ohio’s economy, diverse and robust, draws strength from a wide array of industries, with prominent sectors including healthcare, defense, and manufacturing. These industries are heavily reliant on continuous innovation and R&E.
The healthcare sector is a cornerstone of Ohio’s economy. According to the Ohio Department of Development, major hospital systems are among the state’s largest employers, collectively accounting for 303,581 health sector workers. The Cleveland Clinic, a globally renowned institution and home to numerous innovation centers, stands as the state’s largest single employer with 63,641 employees. Ohio’s health sector transcends its role as a major employer and healthcare provider; it forms the bedrock of a rapidly expanding life sciences innovation economy. This sector’s inherent strength has fueled substantial statewide investment in pharmaceutical research, medical device development, and cutting-edge biomedical engineering. A 2025 report by the Ohio Life Sciences Association highlighted the state’s exceptional performance in life science-related technology patent activity, noting that Ohio exceeds the national average relative to its Gross State Product (GSP). This robust innovation pipeline depends on businesses having the flexibility and financial incentive to invest in new research without being penalized by tax policy.
Ohio also boasts a storied legacy in aviation and defense innovation. While the pivotal first flight of the Wright brothers occurred in North Carolina, a significant portion of the foundational research and experimentation leading to that breakthrough took place in Dayton, Ohio. Following the acquisition of their patent, the Wright brothers returned to Dayton, establishing a collaborative relationship with the city’s burgeoning Air Force base, now known as Wright-Patterson Air Force Base, to further advance aviation research and manufacturing. Today, Dayton remains a critical hub for aerospace and defense technology. Wright-Patterson Air Force Base employs over 33,000 workers, a blend of civilian and military personnel. Beyond the base, the private sector defense contracting industry plays an indispensable role in bridging the gap between strategic innovation needs and the translation of those innovations into tangible national security capabilities. These firms employ thousands of highly skilled engineers, information technology professionals, and supply chain experts. Increasingly, smaller startups and specialized firms contribute to the innovation pipeline, often partnering with larger companies to deliver cutting-edge solutions. Full expensing is particularly vital for these defense contractors and startups, which often operate on tight margins and require rapid reinvestment to stay ahead in a highly competitive and technologically evolving field.
Manufacturing represents another vital economic engine for Ohio. Three of Ohio’s top five manufacturing employers are headquartered within the state, underscoring its historical and contemporary significance in the sector. As of December 2025, approximately 693,000 Ohioans were employed in manufacturing, constituting 14 percent of Ohio’s private sector workforce. The Ohio Manufacturing Association’s 2025 report indicates that every county in Ohio hosts at least one manufacturing establishment, with major metropolitan areas such as Cuyahoga (Cleveland), Hamilton (Cincinnati), Franklin (Columbus), Summit (Akron), and Montgomery (Dayton) each home to over 500 establishments. In Shelby County, situated just north of Dayton, manufacturing jobs account for a remarkable 46.5 percent of all employment. Nationally, Ohio ranks third in manufacturing jobs, comprising 5.3 percent of the nation’s total, behind California (10.3 percent) and Texas (7.4 percent). This strong manufacturing base is not merely about production; it is about enabling the innovations pioneered within the state to be produced and scaled locally, creating a virtuous cycle of R&D and manufacturing excellence.
While life sciences, defense, and manufacturing represent only a fraction of Ohio’s innovation-dependent industries, the intricate interplay among these three sectors alone powerfully illustrates why Ohio must proactively foster continued investment in research and experimentation. If the state aspires to maintain and enhance its leadership in job creation, biomedical technology, national defense capabilities, and advanced manufacturing, providing robust tax incentives for R&D is paramount.
Final Considerations and the Path Forward
Ohio’s key industry sectors are intrinsically linked to ongoing research and experimentation, a process fueled by a diverse array of businesses, from nascent startups and smaller firms to established large corporations. The state’s economic trajectory is thus directly influenced by how its tax code treats these critical investments. While many states offer research and development tax credits, these incentives are often designed in a non-neutral manner, inadvertently benefiting some firms more than others. This makes full and immediate R&E expensing all the more crucial, particularly for smaller firms, startups, and other innovators who may not qualify for or have access to targeted tax credits.
The passage of S.B. 9 and its anticipated signing by Governor DeWine will mark a pivotal step in aligning Ohio’s tax policy with the pro-growth objectives of the OBBBA. By conforming to the federal full expensing for R&E expenditures under Section 174, Ohio will significantly enhance its competitive position as a national leader in innovation. This move will not only provide much-needed clarity and stability for businesses but also send a clear signal that Ohio is committed to fostering an environment where ingenuity can flourish, leading to greater investment, job creation, and sustained economic prosperity across its diverse industrial landscape. The long-term benefits of this conformity are expected to far outweigh any short-term fiscal adjustments, positioning Ohio for continued leadership in the innovation economy.
