This Tax Alert reminds businesses and investors of a law enacted in Ohio in 2021 (House Bill 110) that created two income tax deductions for capital gains. These deductions, however, had a delayed effective date, not becoming operative until tax years beginning on or after January 1, 2026. (See Tax Alert 2021-1322.)

The first provision allows a deduction for capital gains from selling an ownership interest in an Ohio-headquartered business. To qualify, the owner must have either invested at least $1 million in the business or materially participated in the business as determined by reference to Treas. Reg. Section 1.469-5T(a)(1), (2), (3), (4), or (7). The deduction is the lesser of the capital gain received or the business's deductible payroll excluding compensation paid to the owner or relatives. Any remaining gains may qualify for Ohio's Business Income Deduction, which applies to the first $250,000 of business income ($125,000 if married filing separately).

The second provision allows a deduction for venture capital gains received by investors in certified¹ Ohio venture capital operating companies (VCOCs). Qualified investors may deduct 100% of gains from Ohio businesses and 50% from investments in non-Ohio companies, provided the VCOC manages $50 million or more in assets and meets Ohio residency requirements for partners. The VCOC deduction is applied after the standard Ohio Business Income Deduction. Provisions exist to claw back previously deducted gains if the VCOC later fails to meet certification requirements.

Implications

Ohio individual taxpayers may want to consider the application of these deductions, which may be overlooked due to their delayed implementation.