I live and work full-time in Ohio and am a full-time resident. My spouse lives in Texas and is therefore a non-resident for Ohio. We file married filing jointly for federal so I know we have to do the same for Ohio. It seems like Ohio takes the federal AGI (which obviously includes both of our income sources) and then calculates a non-resident credit to essentially remove my spouse's portion of the income from the overall taxable OH equation.
My issue is that my spouse only has significant business losses and has no positive net income. This means we have a federal NOL despite me having a W-2 fully taxable in Ohio, and this federal NOL number is the Ohio "starting point". I would think the Ohio return would essentially back these losses out of the federal NOL, and my Ohio AGI would end up being a positive number that is close to my taxable wages. This isn't the way the form is working though - it's not backing out my spouse's business losses at all, so it's resulting in me getting a refund for everything I paid into the state in 2021 through my payroll withholdings. His business losses are flowing into the OH NRC form and it's properly showing them as not apportioned to Ohio, but there's nowhere on the actual OH 1040 that backs these losses out of the AGI figure.
I am concerned this is incorrect and I'm missing something obvious. Can someone please help?
I'm reaching out to Ohio resident and tax expert @Hal_Al to confirm what I've read. There are no adjustments here. Your Ohio taxable income is calculated as a starting point with Ohio AGI, which is Federal AGI plus Ohio adjustment addbacks (items for which Ohio does not allow a deduction), and subtracting out Ohio adjustment subtractions (which are items that Ohio allows for a deduction that are not deducted on the Federal return). Although the business loss was generated outside of Ohio-sourced income, it is not considered as an item for an Ohio addback. Thus, it is included in Ohio AGI. In addition, when the Nonresident Credit is calculated, tax on negative income is $0. There is no "negative credit" that gets added back for Ohio taxation. What you are describing sounds like the income is being reported correctly, and the resulting tax calculation is getting you back a refund of state tax paid in.
I haven't actually ever encountered this before, but I believe @DanielV01 is correct. You are essentially a "loop hole beneficiary" of Ohio's convoluted way of calculating state tax in this situation.