Key Takeaways
- Ohio taxes “business income” and “non-business income” differently, and for owners selling a closely held company, the classification can swing the tax bill by hundreds of thousands of dollars.
- For years, the Ohio Department of Taxation held that a sale of C corporation stock could not qualify as business income, no matter how involved the owner was in running the company.
- In Bowser v. Harris, the Ohio Board of Tax Appeals rejected that blanket rule, opening the door for actively involved C corporation owners to qualify for business income treatment on a stock sale.
- The decision is not yet final and could be appealed, so business owners planning a sale should build this uncertainty into their tax and deal planning. Whether business income or non-business income treatment is better for a particular taxpayer is complicated, but if the ruling sticks, it will be more uniform.
When Steven Bowser sold his equity interest in Bowser-Morner, Inc., he expected the resulting gain to qualify as business income on his Ohio return. The Ohio Department of Taxation disagreed, and the disagreement came down to one detail: the company was a C corporation.
That single fact, in the Department’s view, was enough to disqualify the Bowsers from favorable treatment that would have saved them $30,000. If the entity had been a partnership or an S corporation, the Bowsers would have been entitled to the treatment. Same business, same level of involvement by Steven, but the kind of entity prevented the more favorable treatment. On July 9, 2026, the Ohio Board of Tax Appeals told the Department it had gotten that wrong.
For Ohio business owners weighing a sale in the next few years, this case is worth understanding well before a term sheet is on the table.
Why the Business Income Label Matters So Much
Ohio (and most states) split income two buckets, and each is taxed differently:
- Business income arises from normal business operations and sale of items used in that businesss. It’s apportioned across states based on a formula that varies by state, but is primarily based on sales with payroll and property still having a role.
- Non-business income is usually treated as “everything that isn’t” business income and is typically sourced entirely to the taxpayer’s state of residence.
Some states, like Ohio, ALSO have different tax rates for each kind of income. For state income tax, the difference between the two classifications is just as large as the IRS’ distinction between ordinary income and capital gain – it’s a big deal. For a sale generating five, ten, or fifty million dollars, that classification is often the difference between a modest state tax bill and a painful one.
Ohio has offered a business income deduction and preferential rate structure for roughly a decade, which is exactly why owners have fought so hard over which bucket their gain falls into. The rates have shifted somewhat since then, but the legal question the Bowsers raised still shapes outcomes for pending refund claims and future transactions alike.
An Inequity Baked Into Entity Structure
Because sales of business entities take a great number of forms today (for both legal and federal tax reasons) Ohio’s legislature clarified that a sale of business equity qualifies as business income when the owner “materially participated” in the business. If that phrase sounds familiar, it is – the phrase is borrowed from a federal tax rule. One way of materially participating in a business is spending 500 hours or more in the business. That standard borrows directly from federal passive activity rules and was meant to separate hands-on owner-operators from passive investors.
The Department of Taxation, however, read that clarification narrowly. It accepted material participation as a path to business income treatment for owners of S corporations and partnerships, but drew a hard line at C corporations. Under the Department’s position, two family business owners could run nearly identical companies, work identical hours, and still land on opposite sides of Ohio’s tax code purely because one treats their business as a federal C corporation and another as a partnership.
What the Board of Tax Appeals Decided
The Board looked at the plain language of the statute and found no basis for the Department’s categorical exclusion of C Corporations. Capital gains can be non-business income, the Board noted, but the statute doesn’t say they must be. After all, the rule is that non-business income is everything that isn’t business income. So if you already concluded a particular thing is business income…kind of makes sense that it wouldn’t be nonbusiness income, right? The Board rejected the Department’s argument that the legislature meant to carve out closely held C – those are companies owned by a small group of people as opposed to stock in a publicly traded company. Because Bowser-Morner qualified as a closely held corporation under the relevant federal regulations, Steven materially participated in the business, and the sale was a sale of equity in the company, the Board held that the Bowsers’ gain met the standard and they reversed the Department’s denial of business income treatment.
In practical terms, the ruling replaces a bright-line rule based on entity type with a facts-and-circumstances test based on the owner’s actual involvement in the business, the same test that already applied to pass-through entities. Note that just because the Ohio rule now seems to be coming into more common sense alignment, where a business with similar facts are treated similarly regardless of entity type, other complexity remains.
Where This Leaves Business Owners Today
A few things are worth sitting with as this plays out:
- The decision isn’t final. The Department of Taxation may appeal to the Ohio Supreme Court, and its official position on sales of C corporation stock sales hasn’t changed. Which rule do you apply to your tax return this year if the matter still isn’t settled?
- Nothing is ever easy. Balancing Ohio’s rules with other states rules, as well as your legal team and federal income tax team’s considerations is the larger context here. You should work with a specialized group, like one we have at Rea, to plan and coordinate all the moving parts on the sale of your business.
- Past sales may be worth a second look. If you sold C corporation stock in recent years and reported the gain as non-business income, it may be worth revisiting whether a protective refund claim makes sense within the applicable statute of limitations. Rea can help you with this kind of claim and if it may save you substantial tax dollars – but the clock is ticking on claiming refunds.
- Entity structure now carries more planning weight. For owners who haven’t sold yet, this is one more reason to talk through structure with a tax advisor well before a transaction is on the horizon, not after. We work with business owners all the time to consider entity type, format of transaction, and even state of domicile at the time of the sale to maximize net proceeds that can fuel both your the next chapter and your legacy.
Let’s Talk Before the Deal Closes
Classification questions like this are easiest to solve well ahead of a sale, when there’s still time to structure the deal, document participation, and model out the tax impact under more than one scenario. Rea’s State & Local Tax advisors work alongside business owners across Ohio through exactly these kinds of decisions, bringing technical depth and a genuine seat at the table when it matters most.
If you’re planning a sale, sitting on a past transaction that may warrant a second look, or simply want to understand how this ruling affects your situation, reach out to our SALT team to start the conversation.
About the Author
Joe Popp, JD, LLM, Principal – State & Local Tax, Rea
Joe advises Ohio business owners through the tax questions that arise at the most consequential moments in a company’s life, including sales, mergers, and ownership transitions. His work on multistate and Ohio-specific tax matters gives him a close vantage point on cases like Bowser v. Harris, where the line between business and non-business income can carry a real cost for owners who aren’t watching closely.
