On Friday, June 24, 2022, Governor Mike DeWine signed House Bill 515 (HB 515) into law. This bill is taxpayer-friendly and is intended to clarify existing law. To that end, HB 515 states the following: “The amendment by this act of Section 5747.01 of the Revised Code is a remedial measure intended to clarify existing law and applies to any petition for reassessment of any appeal thereof and to any application for refund or any appeal thereof pending on or after the effective date of this section and to any transaction that is subject to an audit by the Department of Taxation on or after that effective date.”
Now that we got the facts out of the way…what does this mean to Ohio taxpayers and why is it taxpayer-friendly? To answer those questions, first a little background:
Dating back to 2016, Ohio changed how it taxes “business income” in a favorable way, including:
- The first $250,000 of “business income” for “Single” and “Married filing jointly” taxpayers that is included in federal adjusted gross income is deductible from their Ohio taxable income (this threshold is $125,000 for “Married filing separately” taxpayers); and,
- Any “business income” in excess of those thresholds is taxed at a flat rate of 3%
It has been unclear, up until now, whether or not gains from the sale of one’s business would be considered “business income” and receive the favorable tax treatment described above. In particular, it was unclear if any such gains from the sale of one’s equity interest in a business would qualify (because generally capital gains an losses are not considered “business income”). HB 515 clarifies the treatment by stating the following in its revised Section 5747.01(B), which defines “business income”.
“…“Business income” includes income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill or the sale of an equity or ownership interest in a business…” HB 515 goes on to say: “…the “sale of an equity or ownership interest in a business” means sales to which either or both of the following apply:
- The sale is treated for federal income tax purposes as the sale of assets.
- The seller materially participated, as described in 26 C.F.R. 1.469-5T, in the activities of the business during the taxable year in which the sale occurs or during any of the five preceding taxable years.”
What this means for Ohio taxpayers is that they can now affirmatively treat any gains from the sale of their business as “business income” no matter if the transaction is treated as an asset or a stock sale for federal income tax purposes. It is important to point out, however, the requirement as stated above that if a transaction is a stock sale (and treated as such for federal income tax purposes), the seller must have materially participated (under the federal income tax rules) in the business either during the taxable year in which the sale occurred or during any of the five preceding taxable years.
Finally, let us know if you have had gains from the sale of your business in a prior year and have NOT treated the gain as “business income”, or if you have paid a tax assessment based on the Ohio Department of Taxation’s (ODT) interpretation of the law. You may be able to apply for a refund. If you have a case pending at the appeals division due to an assessment by ODT treating the gain from a sale of your business as “non-business” income, you should receive a favorable resolution of your case; at this point, it is unclear whether Ohio plans to resolve all pending cases together or on an individual basis. Stay tuned for an update on this.
Please contact us if you wish to discuss this further and to determine how HB 515 may impact your Ohio tax situation.