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What Ohio’s Clarification of the Ohio Business Income Definition Means for Business Owners and Sellers

June 27, 2022

June 27, 2022

On June 24, 2022, Governor DeWine signed House Bill 515, providing a needed clarification of the definition of “business income” under Ohio’s income tax law. Clarification of the law became necessary after different readings of the “business income” definition led to disputes between the Ohio Department of Taxation (“Department”) and taxpayers whose income included a gain from the sale of a business. In sum, taxpayers who recently sold, or plan to sell, their business ownership interests have an opportunity to claim an income deduction and preferential tax rate.

The definition of “business income” serves two functions under Ohio law. First, along with its converse “non-business income,” it is used to determine whether a source of income is apportionable among states where the taxpayer does business (business income) or must be allocated to a taxpayer’s state of domicile (non-business income). Second, Ohio provides for a Business Income Deduction (the “BID”) equal to $250,000 of business income, and preferential 3% flat tax rate on business income exceeding $250,000.

Under prior law, the definition of business income includes income from a partial or complete liquidation of a business, including gain or loss from the sale or other disposition of goodwill. Based on prior law, the Department took the position that gains from the sale of equity interests in a business are non-business income to which the BID and preferential tax rate do not apply. As a result, when taxpayers sold ownership interests in their businesses, the Department challenged and denied taxpayers’ claims of the BID and preferential tax rate.

The new law clarifies that business income includes income from the sale of an equity or ownership interest in a business, as long as the taxpayer materially participated in the business in the year of the sale, or during any of the five preceding taxable years. A taxpayer materially participates in a business if the taxpayer participates on a regular, continuous, and substantial basis during the taxable year, or meets the participation requirements under 26 C.F.R. § 1.469-5T.

The clarification is retroactive and becomes effective September 22, 2022. Thus, taxpayers who sold their business ownership interests within the last 3 years and materially participated in their business can amend their Ohio income tax returns to claim the BID and preferential 3% tax rate.

For additional information or advice on BID matters, contact us below.


Giulia Di Cenzo and Mike Sorice are associates at Walter  Haverfield who assist closely held businesses with business succession planningmergers and acquisitions, and tax planning. Mike can be reached at or at 614-246-2262. Giulia can be reached at or at 216-658-6230.