Overview
Ohio Governor Mike DeWine signed 2022 House Bill 515 (“law” or “law change”) on June 24, 2022, clarifying the sale of an equity or ownership interest in a business qualifies for the Ohio Business Income Deduction (BID). The bill’s changes apply to any transactions, refund applications, audits, petitions for reassessments and appeals pending on or after the bill’s 90-day effective date. To qualify as business income, certain requirements must be met including either a) the sale must be treated for federal tax purposes as the sale of assets or b) the seller materially participated in the activities of the business during the taxable year in which the sale occurs or during any of the five preceding taxable years.
Sale of a Business Interest
Ohio HB 515 added a new qualifying gain exclusion for the sale of an interest in a business by adding ORC Sec. 5747.01(B)(1) and (B)(2). Section 3 of HB 515 states it is a “remedial measure intended to clarify existing law.”
A qualifying gain or loss is defined in new ORC Sec. 5747.01(B) as the gain or loss on the sale of an equity or ownership interest in a business to which either or both of the following apply (1) The sale is treated for federal income tax purposes as the sale of assets or 2) 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.[1]
Sale of Assets for Federal Income Tax
The first qualifying type of transaction the law clarified is when the sale is treated as a sale of assets for federal income tax purposes.[2] The list of sales that can qualify as a sale of assets under federal law include, but are not limited to:
- Transactions qualifying under I.R.C. Sec. 336(e).
- An entity making an I.R.C. Sec. 338(h)(10) election the sale of S-Corp stock.
- The sale of 100% of disregarded single-member LLC treated for federal income tax purposes as an asset sale.
- The sale of a 100% of a Q-Sub treated as the sale of assets for federal income tax purposes.
- Any transactions treated as a deemed sale of assets for federal tax purposes.
Seller Materially Participated in the Business
The second qualifying type of transaction the law clarified is when the owner materially participated in the business during the year of sale or any of the previous five years.[3]
The tax law references the description in the U.S. Code of Federal Regulations 26 C.F.R. 1.469-5T to define material participation in the activities of the business. Such material participation can be during the year of sale or any of the five preceding years.
Tax Law Clarification
The Ohio legislature intended R.C. 5747.01(B)(1) and (B)(2) to clarify existing law. The bill’s inclusion of the gain on the sale of an interest in a business to apply to transactions, refund applications, audits, assessments, petitions for reassessments and appeals pending on or after the date of the legislation 90-day effective date.[4] HB 515 is widely viewed as favorable legislation for Ohio taxpayers. However, some uncertainty still exists for certain types of transactions involving nonresident taxpayers with equity transactions.
Taxpayer Considerations
Taxpayers who have engaged in the sale of a business in the past several years where the transaction was not eligible for Ohio BID, may consider filing a refund claim related to this law change. Further, business owners currently in a tax controversy situation with the Ohio Department of Taxation related to the Ohio BID should consider the impact of this law change. Prospective transactions should be carefully evaluated for potential eligibility given the law changes for Ohio BID treatment and/or options available to establish eligibility for BID treatment ahead of a potential transaction.
For more information or to file an Ohio refund claim, please contact us or contact a member of Clark Schaefer Hackett’s State and Local Tax Professionals Group or CSH’s Transaction Tax Group:
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[1] Added in HB 515 under R.C. Sec. 5747.01(B)(1) and (B)(2).
[2] R.C. Sec. 5747.01(B)(1)
[3] R.C. 5747.01(B)(2)
[4] Ohio Legislative Service Commission H.B. 515 Bill Analysis
