Ohio’s Proposed R&D Credit Expansion Could Unlock State Income Tax Savings

Why It Matters

The expansion could unlock cash‑tax savings for Ohio innovators who previously could not use the credit, enhancing the state’s competitiveness and prompting immediate tax‑planning adjustments.

Key Takeaways

• Ohio H.B. 756 lets R&D credit offset state income tax, not CAT
• Credit stays nonrefundable; firms must manage timing and carryforward
• Document Ohio QREs now to maximize owner‑level tax benefits
• Pass‑through owners gain cash‑tax relief despite low CAT liability

Pulse Analysis

Ohio’s R&D tax credit has long been tied to the Commercial Activity Tax, a levy that many early‑stage firms and pass‑through entities now avoid thanks to rising exemption thresholds—$3 million in 2024 and $6 million in 2025. As a result, companies with genuine innovation spend often find the credit unusable, limiting Ohio’s ability to attract and retain high‑tech talent. The existing credit, calculated at 7 % of QREs exceeding a three‑year average, provides a valuable cash‑tax offset when a CAT liability exists, but its utility has narrowed for smaller players.

House Bill 756 seeks to remedy that gap by permitting the same credit framework to be applied against Ohio state income tax. While the credit remains nonrefundable, the bill introduces a seven‑year carryforward provision and explicit guardrails to prevent double‑dipping on the same QREs. This shift changes the calculus for tax planners: timing of expense recognition, entity structure, and projected owner‑level income become critical variables. Firms can now model scenarios where the income‑tax credit yields a higher net benefit than the CAT credit, especially for pass‑through owners who face personal tax liabilities.

For businesses, the practical implication is clear—start documenting Ohio‑based research activities immediately. CPAs should build audit‑ready QRE substantiation, run comparative models, and advise on entity elections that maximize the credit’s impact. Beyond individual savings, the proposal signals Ohio’s intent to broaden its innovation incentive toolkit, potentially prompting other states to consider similar expansions. Early adopters who align their R&D accounting with the pending legislation stand to gain a competitive tax advantage while contributing to the state’s broader economic development goals.