Ohio follows the section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed.
Federal QSBS Exclusions and State Tax Implications
Allowing capital gains tax exclusions for Qualified Small Business Stocks (QSBS) encourages investment in US small business. QSBS laws help provide capital for these businesses while offering a savvy tax strategy for investors who want to minimize capital gains taxes.
Investors who hold qualified small business stock for at least 5 years can exclude up to $10,000,000 or more of their recognized capital gains from their taxable income if certain criteria are met.
Each state has its own treatment of QSBS gains at the state income tax level. There are three ways in which states typically address the exclusion.
- Some states fully conform to the Federal QSBS guidelines, and therefore allow a full exemption if the stock meets the Section 1202 QSBS criteria. States conform to the federal tax code on either a static or rolling basis. “Static” conformity means the state starts conforming to the Internal Revenue Code as of a specific date. “Rolling” conformity means that the state adopts IRC changes as they occur. Alternatively, certain states do not have state income taxes and therefore there is no QSBS implication at the state level.
- Some states partially conform to the Federal QSBS guidelines, whereby the capital gains from QSBS are exempt if additional criteria beyond the Federal guidelines are met, such as only allowing exemptions if the QSBS gains were from a company doing business in that state.
- Lastly, certain states do not allow any capital gains exclusions for QSBS.
Ohio QSBS Exemptions
Ohio follows the Section 1202 100% tax exclusion on capital gains from the sale of QSBS. Therefore, capital gains on the sale of QSBS will not only be excluded from federal income taxes, but also state income taxes if all of the guidelines are followed.
Ohio follows the “Static” conformity–as stated in the previous paragraphs. Ohio does not, at the Corporate level, conform to the federal exclusion from gain of certain small business stock. Rather, Ohio imposes a Commercial Activity Tax, in connection with the corporate franchise tax. The tax is based on the gross receipts of all businesses except financial institutions; however, Ohio does impose a financial institutions tax. See Ohio Rev. Code Ann. § 5701.11, as amended by 2021 Ohio S.B. 18(D) (effective as of March 31, 2021); Ohio Rev. Code Ann. § 5733.04(G), (J); Ohio Rev. Code Ann. § 5751.01(K); Ohio Rev. Code Ann. § 5726.02.
Ohio does, at the Individual level, generally conform to the federal partial exclusions for gain from certain small business stock. See Ohio Rev. Code Ann. § 5747.01(A).
Ohio Capital Gains Tax Rates
The state of Ohio taxes capital gains at the same rates as regular income. The state has 6 tax brackets ranging from 0% for income up to $22,150 to 4.797% for income over $221,300 and are the same for every filing status.
In comparison, federal capital gains tax rates are lower than regular income taxes and have 3 brackets for single taxpayers which are:
- 0% for $0 to $39,375
- 15% for $39,376 to $434,550
- 20% for $434,551 or more
Entrepreneurship in Ohio
Among the many valuable resources available to entrepreneurs in the state of Ohio is The Brandery.
“A nationally-ranked accelerator that leverages the expertise of the Cincinnati region, namely branding, marketing, and design. In addition to an elite mentor network, startups are paired with world-class creative agencies and have access to some of the biggest companies in the world, including Procter & Gamble and Kroger.”
“…[T]he Entrepreneurship and Business Assistance Centers provide resources for starting or maintaining a small business in Ohio. Located throughout the state, the centers provide technical assistance, training and financial counseling to Ohio’s entrepreneurs, minority and small business owners.”
Among other industries, the following industries in particular thrive in the state:
- Real Estate
- Health Care
- Professional Services
- Food Service
- Social Assistance
Investment Programs other than QSBS
With an emphasis on IT and health care, JobsOhio has created a Growth Capital Program with an intent to allocate as individual investments into Ohio-based early-stage venture-backed companies.
Ohio Opportunity Zones
Ohio is home to approximately 320 Opportunity Zones.
Opportunity Zones (OZ) were created to help economically distressed areas by giving investors preferential tax treatment with new investments in these “specified” areas. Similar to QSBS, if the investment meets eligibility criteria and is held for at least 5 years, the investor can defer or be exempted from capital gains taxes (i.e. if held for at least 5 years, the taxpayer can exclude 10% of the gain and the percentage increases (or “steps up”) to 15% after 7 years).
Opportunity Zone investments can be in the stock of an OZ Qualified Business, an OZ partnership interest or an OZ business property.
To be a Qualified Opportunity Zone Business, the business must meet requirements such as at least 50% of the business’s total gross income being derived from within the Opportunity Zone. To learn more about Opportunity Zone qualifications, please refer to the Opportunity Zones and QSBS article.
Under the Tax Cuts and Jobs Act of 2017, 26 USC 1400Z-2, Ohio made Opportunity Zones, is also home to the associated tax relief incentives that accompany these zones which are effective for tax years beginning on or after December 31, 2017. Refer to this map for the Opportunity Zones in the state and here for all Opportunity Zones in the United States.
Some examples of Opportunity Zone Investments in Ohio include:
- Sandy’s Ice Cream Shop
- Morgan County Hotel
- Zahn’s Corner Industrial Park
See more at Ohio Opportunity Zones.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.