Ohio Income Tax – Ohio Clarifies when Sales of Business qualify for Favorable Business Income Treatment

Ohio has finally given taxpayers long-awaited clarity on the tax treatment for sales of business.  H.B. 515 specifically addresses two situations when gains from the sale of an equity or ownership interest qualify as “business income” for Ohio income tax purposes. R.C. 5747.01(B).

The sale of an equity or ownership interest of a business is treated as business income if:

  1. the sale is treated as a sale of assets for federal tax purposes; or
  • when the taxpayer materially participated in the activities of the business during the taxable year of sale or in any of the preceding five taxable years. See 26 C.F.R. 1.469-5T.

The Ohio Department of Taxation has historically taken the position that sales of equity created non-business income even when the sellers actively participated in the operation of the underlying business.

Ohio residents who sell their equity interest meeting one of the above requirements will treat their gain from the sale as business income, which is eligible for the business income deduction up to $250,000 (if married filing jointly) and subject to a more favorable 3% rate. R.C. 5747.01(A)(28); 5747.02(A)(4). However, nonresidents may not see their Ohio taxes changed based on the new bill; their taxes may actually increase since any business income generated will be subject to apportionment to Ohio (depending on the entity’s business activities in Ohio).

The law takes effect on September 21, 2022, because the law is remedial and meant to clarify existing law, it applies to any petition for reassessment, refund application, or any appeal thereof that is pending on or after the effective date. Taxpayers who recently sold equity interests meeting the above requirements may still be able to seek refunds for the difference between nonbusiness and business income taxes paid.

If you have questions about how Ohio H.B. 515 impacts your Ohio tax treatment or think you might be eligible for a refund, please contact us.