Apply Ohio's business income deduction and 3% business tax; add both deductions back in modified AGI

changelog.d/fix-oh-dependent-capital-gain.fixed.md

@@ -0,0 +1 @@
+Exclude tax-unit dependents' qualifying capital gain deductions from the filers' Ohio AGI and modified AGI accounting.

changelog.d/fix-oh-modified-agi-addbacks.fixed.md

@@ -0,0 +1 @@
+Ohio now applies the business income deduction and the 3% tax on taxable business income, and modified adjusted gross income adds back the business income deduction and, from 2026, the qualifying capital gain deduction; personal exemptions and the exemption credit use modified adjusted gross income.

policyengine_us/parameters/gov/states/oh/tax/income/business_income/rate.yaml

@@ -0,0 +1,14 @@
+description: Ohio taxes taxable business income at this flat rate.
+values:
+  2021-01-01: 0.03
+metadata:
+  unit: /1
+  period: year
+  label: Ohio business income tax rate
+  reference:
+    - title: R.C. 5747.02(A)(4)(a)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.02
+    - title: 2024 Ohio Schedule of Business Income, line 16
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2024/1040-bundle-original-fi.pdf#page=5
+    - title: 2024 Ohio IT 1040 Instructions, Ohio Schedule of Business Income, Part 3
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2024/it1040-booklet.pdf#page=27

policyengine_us/parameters/gov/states/oh/tax/income/business_income/sources.yaml

@@ -0,0 +1,25 @@
+description: Ohio counts these income sources as business income on the Schedule of Business Income.
+values:
+  2021-01-01:
+    - self_employment_income # Schedule C, line 2
+    - sstb_self_employment_income # Schedule C, line 2
+    - partnership_s_corp_income # Schedule E pass-through income, line 4
+    - farm_operations_income # Schedule F, line 6
+metadata:
+  unit: list
+  period: year
+  label: Ohio business income sources
+  reference:
+    # "Generally, income recognized by a sole proprietorship or pass-through
+    # entity is business income." Interest, dividends, capital gains, rents
+    # (including farm rent), royalties, trust income and Form 4797 gains are
+    # business income only when they arise in a trade or business, which the
+    # model cannot observe, so they are treated as nonbusiness income. Wages
+    # and guaranteed payments a pass-through pays a 20%-or-more owner
+    # (schedule line 5) are not modeled.
+    - title: R.C. 5747.01(B) and (C)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.01
+    - title: 2024 Ohio IT 1040 Instructions, Definitions and Examples of Business and Nonbusiness Income
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2024/it1040-booklet.pdf#page=11
+    - title: 2024 Ohio IT 1040 Instructions, Ohio Schedule of Business Income
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2024/it1040-booklet.pdf#page=26

policyengine_us/parameters/gov/states/oh/tax/income/deductions/business_income/cap.yaml

@@ -0,0 +1,25 @@
+description: Ohio limits the business income deduction to this amount, by filing status.
+metadata:
+  propagate_metadata_to_children: true
+  label: Ohio business income deduction cap
+  period: year
+  unit: currency-USD
+  breakdown:
+    - filing_status
+  reference:
+    - title: R.C. 5747.01(A)(28)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.01
+    - title: 2024 Ohio Schedule of Business Income, line 12
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2024/1040-bundle-original-fi.pdf#page=5
+    - title: 2021 Ohio IT 1040 Instructions, Business Income
+      href: https://dam.assets.ohio.gov/image/upload/tax.ohio.gov/forms/ohio_individual/individual/2021/pit-it1040-booklet.pdf#page=10
+SINGLE:
+  2021-01-01: 250_000
+JOINT:
+  2021-01-01: 250_000
+SEPARATE:
+  2021-01-01: 125_000
+HEAD_OF_HOUSEHOLD:
+  2021-01-01: 250_000
+SURVIVING_SPOUSE:
+  2021-01-01: 250_000

policyengine_us/parameters/gov/states/oh/tax/income/deductions/deductions.yaml

@@ -11,6 +11,8 @@ values:
     - oh_unreimbursed_medical_care_expense_deduction_person
     - us_govt_interest_person
     - salt_refund_income
+    - oh_business_income_deduction_person # Schedule of Adjustments, line 13
+    - oh_qualifying_capital_gain_deduction # R.C. 5747.01(A)(34), from 2026
 
 metadata:
   unit: list

policyengine_us/parameters/gov/states/oh/tax/income/deductions/qualifying_capital_gain/in_effect.yaml

@@ -0,0 +1,13 @@
+description: Ohio allows the qualifying capital gain deduction if this is true.
+values:
+  2021-01-01: false
+  2026-01-01: true
+metadata:
+  unit: bool
+  period: year
+  label: Ohio qualifying capital gain deduction in effect
+  reference:
+    - title: R.C. 5747.79(B)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.79
+    - title: R.C. 5747.01(A)(34)
+      href: https://codes.ohio.gov/ohio-revised-code/section-5747.01

policyengine_us/reforms/states/oh/dependent_exemption/oh_dependent_exemption_reform.py

@@ -34,8 +34,9 @@ def formula(tax_unit, period, parameters):
             # Negative amount sentinel = use the discrete MAGI-stepped schedule
             # (no-op default, since the contrib schedule mirrors the baseline);
             # a value >= 0 applies a flat per-dependent amount instead.
-            agi = tax_unit("oh_agi", period)
-            stepped_per = p.schedule.amount.calc(agi)
+            # The baseline schedule is stepped by modified AGI (R.C. 5747.025).
+            modified_agi = tax_unit("oh_modified_agi", period)
+            stepped_per = p.schedule.amount.calc(modified_agi)
             per_dependent = where(p.amount < 0, stepped_per, p.amount)
             return count * per_dependent
 
@@ -77,8 +78,8 @@ class oh_personal_exemptions(Variable):
 
         def formula(tax_unit, period, parameters):
             p_base = parameters(period).gov.states.oh.tax.income.exemptions.personal
-            agi = tax_unit("oh_agi", period)
-            per_person = p_base.amount.calc(agi)
+            modified_agi = tax_unit("oh_modified_agi", period)
+            per_person = p_base.amount.calc(modified_agi)
 
             # Personal portion = all eligible persons minus the dependents that
             # are separated out (over-age dependents stay in the personal count).

policyengine_us/tests/core/test_oh_filer_deduction_invariants.py

@@ -0,0 +1,229 @@
+"""Ohio deductions and addbacks use income on the filers' return.
+
+R.C. 5747.79(A)(1) permits qualifying capital gain only to the extent it
+has not been excluded from federal or Ohio AGI; subsection (B) limits the
+deduction to deductible payroll. A dependent's income is excluded from the
+filers' federal AGI. R.C. 5747.01(A)(28) limits the business deduction to
+business income in federal AGI, capped at $250,000 for single and joint
+returns. Subsection (II) adds both deductions back to Ohio modified AGI.
+
+Sources: https://codes.ohio.gov/ohio-revised-code/section-5747.79 and
+https://codes.ohio.gov/ohio-revised-code/section-5747.01.
+
+Each Hypothesis example evaluates six tax units and their twins together:
+one or two filers and one through three dependent children. Actual capital gains and
+S-corporation income avoid unrelated loss allocation. An independent sum
+over filers checks federal AGI, the deductions and Ohio AGI, then a twin
+tax unit with dependent gain and business inputs zeroed checks that those
+inputs cannot change the filers' deductions or either Ohio AGI measure.
+"""
+
+import numpy as np
+from hypothesis import HealthCheck, given, settings
+from hypothesis import strategies as st
+
+from policyengine_us import Simulation
+
+YEAR = 2026
+TOLERANCE = 0.01
+DEPENDENT_INPUTS = (
+    "long_term_capital_gains",
+    "s_corp_income",
+    "oh_qualifying_capital_gain",
+    "oh_qualifying_capital_gain_deductible_payroll",
+)
+PERSON_OUTPUTS = (
+    "adjusted_gross_income_person",
+    "oh_business_income_deduction_person",
+    "oh_qualifying_capital_gain_deduction",
+)
+UNIT_OUTPUTS = (
+    "adjusted_gross_income",
+    "oh_business_income_deduction",
+    "oh_agi",
+    "oh_modified_agi",
+)
+
+
+@st.composite
+def person_amounts(draw, *, dependent):
+    return {
+        "employment_income": draw(st.integers(1, 100_000)),
+        "s_corp_income": draw(st.integers(1 if dependent else 0, 350_000)),
+        "long_term_capital_gains": draw(st.integers(1 if dependent else 0, 400_000)),
+        "oh_qualifying_capital_gain": draw(
+            st.integers(1 if dependent else -50_000, 400_000)
+        ),
+        "oh_qualifying_capital_gain_deductible_payroll": draw(
+            st.integers(1 if dependent else -50_000, 400_000)
+        ),
+    }
+
+
+@st.composite
+def tax_unit_batch(draw):
+    return [
+        {
+            "filers": [draw(person_amounts(dependent=False)) for _ in range(n_filers)],
+            "dependents": [
+                draw(person_amounts(dependent=True)) for _ in range(n_dependents)
+            ],
+        }
+        for n_filers in (1, 2)
+        for n_dependents in (1, 2, 3)
+    ]
+
+
+def _run(units):
+    situation = {
+        "people": {},
+        "tax_units": {},
+        "households": {},
+        "marital_units": {},
+    }
+    # Evaluate each unit and its twin in one vectorized simulation.
+    for i, unit in enumerate(units + units):
+        members, filers = [], []
+        for j, amounts in enumerate(unit["filers"] + unit["dependents"]):
+            dependent = j >= len(unit["filers"])
+            name = f"person_{i}_{j}"
+            values = {
+                **amounts,
+                "age": 10 if dependent else 45,
+                "is_tax_unit_head": j == 0,
+                "is_tax_unit_spouse": j == 1 and not dependent,
+                "is_tax_unit_dependent": dependent,
+            }
+            if dependent and i >= len(units):
+                values.update({variable: 0 for variable in DEPENDENT_INPUTS})
+            situation["people"][name] = {
+                variable: {YEAR: value} for variable, value in values.items()
+            }
+            members.append(name)
+            if dependent:
+                situation["marital_units"][name] = {"members": [name]}
+            else:
+                filers.append(name)
+        situation["marital_units"][f"filers_{i}"] = {"members": filers}
+        situation["tax_units"][f"tax_unit_{i}"] = {
+            "members": members,
+            "filing_status": {YEAR: "JOINT" if len(filers) == 2 else "SINGLE"},
+        }
+        situation["households"][f"household_{i}"] = {
+            "members": members,
+            "state_code": {YEAR: "OH"},
+        }
+    simulation = Simulation(situation=situation)
+    outputs = {
+        variable: np.asarray(simulation.calculate(variable, YEAR), dtype=float)
+        for variable in PERSON_OUTPUTS + UNIT_OUTPUTS
+    }
+    outputs["dependent"] = np.asarray(
+        simulation.calculate("is_tax_unit_dependent", YEAR), dtype=bool
+    )
+    index = simulation.populations["tax_unit"].members_entity_id
+    n_people = len(index) // 2
+    runs = []
+    for half in (0, 1):
+        results = {}
+        for variable in PERSON_OUTPUTS + ("dependent",):
+            results[variable] = outputs[variable][
+                half * n_people : (half + 1) * n_people
+            ]
+        for variable in UNIT_OUTPUTS:
+            results[variable] = outputs[variable][
+                half * len(units) : (half + 1) * len(units)
+            ]
+        results["unit"] = index[half * n_people : (half + 1) * n_people] - half * len(
+            units
+        )
+        runs.append(results)
+    return runs
+
+
+def _unit_sum(run, amounts):
+    return np.bincount(
+        run["unit"], weights=amounts, minlength=len(run["adjusted_gross_income"])
+    )
+
+
+@settings(
+    max_examples=5,
+    deadline=None,
+    derandomize=True,
+    suppress_health_check=[HealthCheck.too_slow, HealthCheck.data_too_large],
+)
+@given(tax_unit_batch())
+def test_dependent_income_cannot_change_ohio_filer_deductions(units):
+    run, zeroed = _run(units)
+    filer = ~run["dependent"]
+    people = [
+        person for unit in units for person in unit["filers"] + unit["dependents"]
+    ]
+
+    def inputs(variable):
+        return np.array([person[variable] for person in people], dtype=float)
+
+    expected_person_agi = filer * (
+        inputs("employment_income")
+        + inputs("s_corp_income")
+        + inputs("long_term_capital_gains")
+    )
+    expected_agi = _unit_sum(run, expected_person_agi)
+    expected_business = np.minimum(
+        250_000, _unit_sum(run, filer * inputs("s_corp_income"))
+    )
+    expected_capital_person = filer * np.minimum.reduce(
+        [
+            np.maximum(0, inputs("oh_qualifying_capital_gain")),
+            inputs("long_term_capital_gains"),
+            np.maximum(0, inputs("oh_qualifying_capital_gain_deductible_payroll")),
+        ]
+    )
+    expected_capital = _unit_sum(run, expected_capital_person)
+
+    for results in (run, zeroed):
+        for variable in PERSON_OUTPUTS:
+            np.testing.assert_array_equal(results[variable][run["dependent"]], 0)
+        np.testing.assert_allclose(
+            results["adjusted_gross_income_person"],
+            expected_person_agi,
+            atol=TOLERANCE,
+        )
+        np.testing.assert_allclose(
+            results["adjusted_gross_income"], expected_agi, atol=TOLERANCE
+        )
+        np.testing.assert_allclose(
+            results["oh_qualifying_capital_gain_deduction"],
+            expected_capital_person,
+            atol=TOLERANCE,
+        )
+        np.testing.assert_allclose(
+            results["oh_business_income_deduction"],
+            expected_business,
+            atol=TOLERANCE,
+        )
+        np.testing.assert_allclose(
+            _unit_sum(results, results["oh_business_income_deduction_person"]),
+            expected_business,
+            atol=TOLERANCE,
+        )
+        np.testing.assert_allclose(
+            results["oh_agi"],
+            expected_agi - expected_business - expected_capital,
+            atol=TOLERANCE,
+        )
+        np.testing.assert_allclose(
+            results["oh_modified_agi"], expected_agi, atol=TOLERANCE
+        )
+    for variable in UNIT_OUTPUTS:
+        np.testing.assert_allclose(
+            run[variable], zeroed[variable], atol=TOLERANCE, err_msg=variable
+        )
+    for variable in PERSON_OUTPUTS:
+        np.testing.assert_allclose(
+            run[variable][filer],
+            zeroed[variable][filer],
+            atol=TOLERANCE,
+            err_msg=variable,
+        )