A recent Ohio Board of Tax Appeals decision could have meaningful tax-planning implications for owners of closely-held C corporations who are considering a sale. In Steven and Pamela Bowser v. Harris, Case No. 2025-1436 (Ohio BTA July 9, 2026), the Board concluded that gain from the sale of an ownership interest in a closely-held C corporation could qualify as business income for purposes of Ohio’s Business Income Deduction when the seller satisfied the state’s material participation requirement.
For Ohio business owners, the decision reinforces an important planning point: the Ohio tax consequences of selling equity may depend on more than entity or transaction type. The owner’s participation in the business before the transaction can also matter.
How Ohio’s Business Income Deduction Works
Ohio law allows qualifying taxpayers to deduct up to $250,000 of business income when calculating Ohio adjusted gross income. The state’s business income definition expressly includes certain gains or losses from the sale of an equity or ownership interest in a business.
Under current Ohio law, a sale of an equity or ownership interest can fall within that definition when either:
- The sale is treated for federal income tax purposes as a sale of assets; or
- The seller materially participated in the business during the year of sale or during any of the five preceding taxable years under the federal material participation rules referenced by Ohio law.
Ohio added this language through House Bill 515, which took effect September 23, 2022 and addressed the treatment of gains from sales of ownership interests in businesses.
What Happened in Bowser?
The taxpayers sold an equity interest in a closely-held C corporation and reported capital gain from the transaction. They later filed an amended 2018 Ohio individual income tax return seeking a refund based on treating the gain as business income eligible for the Business Income Deduction.
The taxpayers actively participated in the corporation for more than 500 hours during the relevant period. The Ohio Department of Taxation denied the refund, taking the position that capital gain from the sale of C corporation stock was nonbusiness income and therefore excluded from the deduction.
The Board of Tax Appeals disagreed and reversed the Commissioner’s final determination.
Why the Board Rejected the Department’s Position
The dispute centered on Ohio’s definitions of business income and nonbusiness income. Ohio law provides that nonbusiness income is income other than business income, which “may” include capital gains. However, the business income definition expressly includes sales of equity or ownership interests if the material participation test is satisfied.
The Board concluded that these provisions can operate together. Capital gain that satisfies the statutory business income requirements may be treated as business income, while capital gains that do not satisfy those requirements remain nonbusiness income.
The Board also rejected the argument that the ownership-interest language added by H.B. 515 was limited to pass-through entities. The statute refers to the sale of an “equity or ownership interest in a business” and does not expressly exclude C corporation stock.
A capital-gain label does not end the Ohio analysis. The statutory business income tests still have to be applied.
How Material Participation Is Determined
Ohio’s statute incorporates the federal material participation rules. One commonly used test treats an individual as materially participating when the individual participates in an activity for more than 500 hours during the year. Other tests can also establish material participation depending on the facts.
The federal regulations also contain specific rules for closely-held corporations. Those provisions were relevant to the Board’s analysis because they address how the passive-activity rules apply to closely-held C corporations and how participation is determined in that context.
What the Decision Means for Ohio Business Owners
The decision does not mean every sale of C corporation stock qualifies for the Ohio Business Income Deduction. The facts of the sale, the owner’s participation history and the applicable tax year still matter.
1. Review participation history before a sale
Owners should determine whether they satisfy one of the federal material participation tests during the year of sale or any of the five preceding taxable years, as required by Ohio law. Participation records can become important evidence in that analysis.
2. Evaluate transaction structure
Ohio law also recognizes federal asset-sale treatment as a separate path for an ownership-interest sale to qualify as business income. A proposed stock sale, asset sale or transaction treated as an asset sale for federal purposes should therefore be modeled with both federal and state tax consequences in mind.
3. Model the Ohio tax result before closing
State tax should be part of transaction planning before the purchase agreement is finalized. For a significant business sale, the classification of gain can affect the seller’s Ohio taxable income and the economics of the transaction.
HBK CPAs & Consultants’ State & Local Tax Advisory team assists businesses and owners with state tax planning, while HBK’s Multistate Income/Franchise Tax services include business-structure reviews, due diligence for proposed corporate changes and analysis of buy-sell agreements.
Could Bowser Create Refund Opportunities for Prior Transactions?
The decision may warrant a review of certain prior stock-sale transactions. Whether an amended return or refund claim is available depends on the facts, the applicable tax year, filing deadlines, participation history and how the gain was originally reported.
Taxpayers should not assume the decision automatically creates a refund. Prior transactions should be reviewed individually.
Planning Before a Business Sale Is Critical
Owners of closely-held businesses often focus first on valuation, buyer terms and federal tax consequences. The Bowser decision is a reminder to bring Ohio tax considerations into the conversation early, as well.
Entity type, deal structure, participation history and documentation can all influence the final result. Early review gives owners and their advisors more time to identify the relevant facts, model alternatives and avoid discovering a state-tax issue after the transaction is complete.
To discuss how this decision may apply to a current or prior transaction, contact the HBK State & Local Tax Advisory team.
Yes. The Ohio Board of Tax Appeals held in Bowser that gain from the sale of stock in a closely-held C corporation could qualify when the statutory requirements were satisfied, including the material participation requirement. The result depends on the specific facts and applicable law.
The deduction generally allows an individual taxpayer to deduct up to $250,000 of qualifying business income. Different limitations can apply depending on filing status and other facts.
Ohio references the federal material participation rules in 26 C.F.R. § 1.469-5T. More than 500 hours of participation is one test, but the federal rules contain several alternative tests.
No. A sale must satisfy the statutory requirements. The analysis can depend on federal tax treatment, material participation, entity facts and the relevant tax year.
Yes. When material participation is relevant, reasonable records of services performed and time spent can help support the tax position. The federal rules recognize several forms of reasonable substantiation.
Sources
- Steven and Pamela Bowser v. Harris, Case No. 2025-1436 (Ohio BTA July 9, 2026) – case update/source provided for this article
- Ohio Revised Code § 5747.01 – Definitions of business and nonbusiness income
- Ohio House Bill 515, 134th General Assembly
- 26 C.F.R. § 1.469-5T – Material participation
- 26 C.F.R. § 1.469-1T – Rules applicable to C corporations and closely-held corporations
- HBK State & Local Tax Advisory
- HBK Multistate Income/Franchise Tax
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