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June 24, 2022

Ohio clarifies tax treatment of certain sales of ownership interests in businesses

On June 24, 2022, Ohio Governor Mike DeWine signed House Bill 515 (HB 515), which clarifies the conditions under which income from the sale of an ownership interest in a business, such as an interest in a partnership or limited liability company, will qualify as business income for individual income tax purposes. HB 515 is remedial in nature and will apply retroactively.

Business vs. nonbusiness income

Ohio law allows individuals to deduct the first $250,000 of business income ($125,000 for spouses filing separate returns) using the business income deduction.1 For business income above $250,000, a flat 3% rate applies. Nonbusiness income, on the other hand, is entirely taxable and subject to individual income tax rates, which are generally higher.

The Ohio Revised Code, Ohio Supreme Court precedent, and guidance from the Ohio Department of Taxation (Department) govern Ohio's tax treatment of income from a sale of an owner's business interest. Due primarily to the Ohio Supreme Court's decision in Corrigan v. Testa, 149 Ohio St.3d 18 (2016) (Corrigan),2 income from the sale of an ownership interest in a business is generally considered nonbusiness income for Ohio income tax purposes. As such, Ohio's business income deduction does not apply, nor does the flat 3% rate. Instead, this income is fully taxed at higher rates.

Since the release of the Corrigan decision, the Department has often determined on audit that taxpayers should treat income from sales of business interests, including those treated as asset sales for federal income tax purposes, as nonbusiness income for Ohio tax purposes. In contrast, the Department typically respects taxpayers' treatment of income from sales of actual business assets as business income.

Nonresidents generally do not incur Ohio tax on income from the sale of their ownership interests in Ohio businesses because Ohio law allocates the nonbusiness income to the nonresident's state of domicile.3 An exception to this treatment could apply, however, for certain nonresident sellers who own 20% or more of the interests in a pass-through entity or certain closely held corporations.4 Under this exception, the nonresident owner must apportion gain from the sale of its interests in the entity based on a three-year average of the entity's Ohio apportionment.

HB 515's changes

HB 515 codifies two conditions under which the sale of an ownership interest in a business will be considered business income:

  • When the transaction is treated as an asset sale for federal income tax purposes
  • When the seller materially participated (as described in Treas. Reg. Section 1.469-5T) in the activities of the business during the tax year in which the sale occurs or during any of the five preceding tax years

Section 3 of HB 515 specifies that these amendments are remedial and "intended to clarify existing law." Accordingly, these provisions apply to petitions for reassessment, applications for refunds, appeals of denials of refunds, and transactions that are under audit by the Department on or after the legislation's effective date. HB 515 is effective 90 days after being signed by the Governor.


The new law could benefit Ohio residents that have satisfied either of the two conditions by treating income from the sale of their business interests as eligible for both the business income deduction and the flat 3% Ohio income tax rate. Ohio resident taxpayers who have had their transactions assessed, including those who have appealed their assessments, should consider applying these remedial provisions to their situations and filing a claim for refund or relief. The statute of limitations for refunds is four years from the payment of the tax.

Nonresidents who owned an Ohio business and sold their interests during the retroactive period, on the other hand, may find that a portion of their income could be taxable in Ohio based on the business activity that is apportioned to Ohio, subject to constitutional limitations.


Contact Information
For additional information concerning this Alert, please contact:
State and Local Taxation Group
   • Bill Nolan (


1 Ohio Rev. Code Sections 5747.01(A)(28), 5747.02(A)(4).

2 See Tax Alert 2016-0859.

3 Ohio Rev. Code Section 5747.20.

4 See Ohio Rev. Code Section 5747.212. This was the provision struck down as unconstitutional in Corrigan as it applied to the taxpayer in that case, although it has been upheld in other cases.