At the end of June, Ohio Governor Mike DeWine signed House Bill 515 (“HB 515”) into law, with it taking effect in September of 2022. HB 515 is intended to clarify the definition of “business income” under Ohio tax law, for state income tax purposes.
Business and nonbusiness income are important concepts in Ohio tax law. Business income refers to the apportionable income among states where the taxpayer’s business is conducted, and it is generated from the business’ operations. Ohio nonbusiness income refers to the earnings allocated to the business’ state of domicile which is generally produced outside of normal business operations. Ohio law favorably taxes business income at a flat 3% and provides for a business income deduction. These tax treatments are not available to nonbusiness income.
Previously, the Ohio Department of Taxation’s position was that the sale of a business interest did not qualify as business income, subject to the favorable flat tax rate and business income deduction, despite the statutory definition of business income including proceeds from a liquidation of a business interest. Taxpayers that claimed business sales’ proceeds as business income, along with claiming the corresponding deduction, were challenged by the Department of Taxation, sometimes resulting in litigation.
To help resolve the disputed interpretations of liquidation proceeds and sales proceeds, HB 515 now provides two scenarios in which income from the sale of an equity interest in a business definitively constitutes business income eligible for the corresponding deduction: (i) if the equity sale is treated as an asset sale for federal income tax purposes (for example, an Internal Revenue Code §338(h)(10) election was made); or (ii) if the seller materially participated in the business activities during the year in which the business is sold, or in any of the five years preceding the sale. Satisfying either of these scenarios will enable the taxpayer to claim the business sales proceeds as business income in Ohio.
It is important to note that legislation is intended to be remedial, such that it will apply to petitions for reassessment, refund applications, and appeals pending on or after HB 515’s effective date, as well as to any sales transaction that is subject to audit on or after HB 515’s effective date.
If you are contemplating the sale of an Ohio business, we welcome the opportunity to speak with you and discuss the impact of HB 515 on your potential transaction, as well as how McCarthy Lebit’s Mergers & Acquisitions team can further assist you with a successful transaction.
Please reach out to request a consultation or call us at 216-696-1422.
