New Ohio law treats the sale of a business as “business income”

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On Friday, June 24, Governor Mike DeWine signed into law House Bill 515. This bill is taxpayer-friendly and seeks to clarify existing law.

To this end, HB 515 states: “The amendment by this Act of section 5747.01 of the revised Code is a remedy intended to clarify the existing law and applies to any request for reassessment of any appeal of that hereof and to any refund request or appeal pending on or after the effective date of this section and to any transaction subject to audit by the Department of Taxation on or after that date. Coming into force. “

Now that we’ve stripped the facts, what does this mean for Ohio taxpayers and why is it taxpayer friendly? To answer these questions, first, a little background.

Since 2016, Ohio has changed the way it taxes “business income” favorably, including:

  • The first $250,000 of “business income” for “single” and “married jointly filing” taxpayers that is included in adjusted federal gross income is deductible from their taxable income in Ohio (this threshold is $125,000 $ for “married separately filing” taxpayers); and,
  • Any “business income” above these thresholds is taxed at a flat rate of 3%.

It was unclear until now whether or not gains from the sale of a business would be considered “business income” and receive the favorable tax treatment described above.

In particular, it was unclear whether such gains from the sale of his interest in a business would qualify (because capital gains and losses are generally 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 transfer of goodwill or the sale of a share or a property interest in a company…”

HB 515 goes on to say, “…the ‘sale of an interest or interest in a business’ means sales to which either of the following apply:

1. The sale is treated for federal income tax purposes as the sale of assets.

2. The seller participated materially, as described in 26 CFR 1.469-5T, in the activities of the business during the taxation year in which the sale takes place or during one of the five years previous taxation.”

This means for Ohio taxpayers that they can now positively treat any gain from the sale of their business as “business income”, regardless of whether the transaction is treated as an asset or a sale of property. shares for federal income tax purposes.

It is important to note, however, the requirement set out above that if a transaction is a sale of stock (and treated as such for federal income tax purposes), the seller must have participated material (under federal income tax rules) to the business either in the tax year in which the sale occurred or in any of the five years of previous taxes.

Finally, tell your tax advisor if you realized any gains on the sale of your business in a previous year and you did NOT treat those gains as “business income” or if you paid a tax. tax based on the Ohio Department of Taxation (ODT) interpretation of the law. You may be able to request a refund.

If you have a pending case in the Appeals Division due to an assessment by the ODT treating the gain from the sale of your business as “non-trading” income, you should receive a favorable resolution of your case; at this point, it’s unclear whether Ohio plans to resolve all outstanding cases together or individually. Stay tuned for an update on this.

Please contact us or your usual tax advisor if you would like to discuss this further and determine how HB 515 may impact your tax position in Ohio.

Ciccotelli is a partner in charge of the tax services group at Meaden & Moore.

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