Ohio has finally given taxpayers long-awaited clarity on the tax treatment of business sales. HB 515 specifically addresses two situations where gains from the sale of an equity or property interest qualify 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 if:
- the sale is treated as an asset sale for federal tax purposes; or
- when the taxpayer materially participated in the business activities during the tax year of the sale or in any of the five preceding tax years. Look 26 CFR 1,469-5T.
The Ohio Department of Taxation has historically held that sales of capital have generated non-business income even when the sellers have actively participated in the operation of the underlying business.
Ohio residents who sell their equity interests that meet 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 jointly) and subject to a more favorable rate of 3%. . RC 5747.01(A)(28); 5747.02(A)(4). However, nonresidents may not see their Ohio taxes change based on the new bill; their taxes may actually increase since any business income generated will be subject to Ohio apportionment (depending on the entity’s Ohio business activities).
The law comes into effect on September 21, 2022. Because the law is ameliorative and intended to clarify existing law, it applies to any request for reassessment, refund application or any appeal thereof that is pending on or after the effective date. . Taxpayers who have recently sold equity interests that meet the above requirements may still be able to claim refunds for the difference between taxes paid on non-business and business income.