Two new Ohio capital gain deductions are now available to qualifying business owners and certain venture capital investors that sell ownership interest in an Ohio business. These provisions were previously signed into law on July 1, 2021, as part of the 2022-2023 Biennium Budget Bill (HB 110), but only became effective in 2026.
The deductions are part of the state’s broader goal to encourage Ohio business investment. As such, business owners should consider the potential impact on transactions and gains recognized beginning this year.
Capital Gains Deduction on the Sale of an Ohio Business
Ohio will provide an income tax deduction to taxpayers with capital gains on the sale of their ownership interest in an Ohio headquartered business. It is important to note this deduction is not available on an asset sale transaction. As such, sellers should be prepared to contemplate when an equity sale could provide a lower effective tax rate.
How Do You Qualify for the Ohio Capital Gains Deduction?
A qualifying owner must sell an equity interest where they:
- Materially participated in the business for the five years immediately preceding a sale, or
- Directly or indirectly made a venture capital investment of at least $1 million dollars.
Further, a qualifying owner must sell an interest in a qualifying Ohio business. For the five years immediately preceding a sale, the Ohio business must have been:
- Headquartered in Ohio, and,
- Incorporated, registered or organized in Ohio.
How Big is the Potential Ohio Capital Gains Deduction?
The Ohio capital gains deduction is the lesser of 1) the owner’s capital gain or 2) the business’ “deductible payroll.”
Each qualifying owner’s share of deductible payroll is computed based on their investment type and ownership percentages:
- For owners qualifying under the material participation requirement, the specified payroll period is the five calendar years preceding a sale;
- For owners qualifying as a venture capital investment, the payroll period includes the owner’s investment period not to exceed the five calendar years immediately preceding a sale.
- Amounts paid to qualifying owners or relatives are excluded from these payroll calculations.
Are Capital Gains Also Eligible for the Ohio Business Income Deduction?
Depending on an owner’s facts and circumstances, their capital gains may also be eligible for Ohio’s business income deduction. Qualifying owners must first claim a qualifying Ohio capital gains deduction before applying Ohio’s business income deduction of up to $250,000 when single/married filing joint ($125,000 married filing separate) on any remaining capital gains when included as part of business income on an owner’s Ohio personal income tax return.
