If you’re considering selling your closely-held business, moving out of state may have crossed your mind as a way to avoid paying Ohio personal income tax on your gains. You might be surprised to learn that simply residing outside the State of Ohio won’t protect you from paying Ohio personal income tax on gains from selling your debt or equity in your business.
Moving to a state that does not have a personal income tax was a tactic that was often used by business owners in the past to avoid paying personal income tax on the proceeds from the sale of a closely-held business. Recognizing that this planning opportunity existed, the Ohio Department of Taxation passed legislation many years ago that made this simple planning opportunity null and void. Today, a non-resident owner of a closely-held pass-through entity or C corporation could face Ohio personal income tax on the income from sale. This tax law applies to non-resident owners of closely-held businesses who own at least 20 percent of the equity voting rights and have property, payroll or sales in Ohio.
Personal income taxes owed to the State of Ohio on the seller’s gain are apportioned based on a formula that looks at the percentage of property, payroll and sales that occurred in Ohio during the past three years.
For example, let’s say the closely-held business had the follow apportionment factors over the last three years:
– $100 of property in Ohio out of $1000 = 20 percent Ohio
– $200 in payroll in Ohio out of $1000 = 20 percent Ohio
– $300 in sales occurring in Ohio out of $1000 = 30 percent Ohio
The apportionment formula would then weight the percentages above (20 percent property, 20 percent payroll and 60 percent sales) and conclude that 26 percent of the sale gains would be apportioned to Ohio in an effort to determine the total amount of the Ohio personal income tax due.
If you’ve been considering selling your closely-held business, advanced planning can help you minimize Ohio personal income taxes on the taxable gains you incur. The impact can vary dramatically depending on your specific situation. Be sure to talk with your tax advisor before you begin the sale process.