Ohio Governor John Kasich recently unveiled a plan to exclude the gain on sale of an Ohio business interest held for 2 years or more from the State’s income tax. The details are not yet known, but the matter has been referred to a tax writing committee in the Ohio General Assembly.
We will monitor the legislation closely.
Perhaps the more obvious questions include:
1. What will be the effective date of such a law? Most laws enacted in Ohio are effective a certain number of days after the Governor signs a bill into law. In certain cases, the effective dates can be made prior to enactment if the law is determined to clarify an existing law. That won’t likely be the case in this instance.
2. Will the law apply only to sales of interests that occur two years after the effective date of the law – that is, limited grandfathering?
3. Will the law only apply to interests acquired after the effective date and held for at least two years? What is to be the treatment of a sale of an interest where the acquisition of the interest took place over several years? Dividend reinvestment plan?
4. If qualified gains are to be excluded, will Ohio deny recognition of losses on qualified interests sold?
5. Will the gain exclusion be subject to a limitation?
6. How will the eligible interest be defined, as sale of stock? Sale of membership interest in an LLC? Sale of partnership interests?
7. Many transactions are structured as a sale of assets as opposed to a sale of business interests. If the sale of substantially all of the business assets (presumably those sourced to Ohio) would not qualify for a gain exclusion, would that fundamentally change the way deals are structured for sales of businesses? Would certain transactions deemed to be asset sales for federal tax purposes qualify when the form of the transaction is a sale of an interest? That would include so-called federal Section 338 elections and certain dispositions of LLC and partnership interests where the entity holds certain asset types.
8. Would a redemption transaction qualify? That means the company makes a distribution to an owner in exchange for some or all of the interest that owner holds in the company. Redemptions are treated as taxable events for federal income tax purposes.
9. How is an Ohio company to be defined? Substantially all of its assets, employees, or revenue are associated with the State?
10. Presumably, the gain exclusion would be passed through to an investor in a fund structured as a pass-through entity (i.e. an LLC or partnership). What about the sale of an interest in a mutual fund or a real estate investment trust (a hybrid pass-through)? Does the mutual fund or REIT need to meet an Ohio source test (i.e. a look through to its asset portfolio, or the location of the employees of the mutual fund or REIT)? Because REITs and mutual funds distribute their gains in the form of taxable distributions, when these types of investment structures pass through gains that are not taxable in Ohio, will they disclose such information to their investors?