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Ohio has finally given taxpayers long-awaited clarity on the tax treatment of business sales. HB 515 specifically addresses two situations in which a gain from the sale of an equity or ownership interest qualifies as “business income” for Ohio income tax purposes. RC 5747.01(b).
The sale of an equity or ownership interest in a business is treated as business income:
- The sale is considered an asset sale for federal tax purposes; Or
- When the taxpayer materially participates in the activities of the business during the taxable year of sale or during the preceding five tax years. watch out 26 CFR 1.469-5T.
The Ohio Department of Taxation has historically taken the position that equity sales generate non-business income even when the sellers are actively involved in the underlying business.
Ohio residents who sell an equity interest meet one of the above requirements and can count the gain from the sale as business income, allowing for a business income deduction of up to $250,000 (if married filing jointly) and a more favorable 3% rate. . RC 5747.01(A)(28); 5747.02(a)(4). However, nonresidents may not see their Ohio taxes change based on the new bill. Since any business income generated is allocable to Ohio (depending on the legal business activity in Ohio), their taxes may increase.
The Act will be effective from September 21, 2022. As the Act is an amendment and is intended to clarify the existing law, any petition for reconsideration, refund application or any appeal shall be filed on or after the effective date. Taxpayers who meet the above requirements and have recently sold equity interests can claim a refund of the difference between the non-business and business income taxes paid.
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