Ohio and California Address Income Tax Treatment for Sales of Equity Interests in a Business

July 29, 2022

By: Jeff Glickman, SALT Partner

At a glance

  • The main takeaway: Ohio enacted a new law and California issued guidance that could create income tax obligations in those states for nonresidents that sell their partnership interests.
  • Impact on your business: For individuals who are selling their businesses, these updates could potentially create multistate tax issues that they need to identify and address. 
  • Next steps: Aprio’s State and Local Tax (SALT) Team has experience advising individuals who are selling their businesses and can help you reduce liabilities in light of these changes.

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The full story:

For state personal income tax purposes, when an individual sells an equity interest in a business — such as the sale of a partnership interest or S-corporation stock — the typical rule is for states to treat that action as the sale of an intangible and source that sale to the individual’s state of domicile. However, there are states that don’t follow that treatment in all cases. Recent guidance in Ohio and California illustrates alternative approaches, as summarized below:


On June 24, 2022, Ohio Governor Mike DeWine signed House Bill 515, which codified two situations in which the sale of an ownership interest in a business will be treated as business income. Under prior law, income from the sale of an ownership interest in a business was generally considered to be nonbusiness income. For non-residents, this likely resulted in zero Ohio income tax on the income from the sale of their ownership interest, since nonbusiness income would have been allocated to the state of the seller’s domicile. Effective September 23, 2022, Ohio statutes now specify two situations in which the sale of an ownership interest will be considered business income:

  1. The sale is treated as a sale of assets for federal income tax purposes, or
  2. The seller materially participates in the activities of the business during the taxable year in which the sale occurs or during any of the five preceding tax years.

Once this new law becomes effective, if either of these conditions exists, the income from the sale of the ownership interest in a business will be considered business income. This change may be favorable for certain Ohio resident taxpayers since Ohio provides a deduction for business income up to a certain amount and then taxes the excess at a lower 3% rate. Therefore, taxpayers who sold their businesses in the past few years and did not take the business income deduction may consider filing a refund claim.

For non-residents, however, this change now means that a portion of such income may be subject to income tax in Ohio. 

The bill also states that this change is intended to clarify existing tax law, and therefore applies to any audits, refund claims, petitions for reassessment, or appeals that are pending on or after September 23, 2022.


On July 14, 2022, the California Franchise Tax Board (FTB) published Legal Ruling 2022-02, explaining the state personal income tax treatment to a nonresident of the sale of a partnership interest to the extent that there is IRC § 751 property (751 property) located in California.

For federal income tax purposes, when a partner sells a partnership interest, the gain is generally treated as a capital gain under IRC § 741 unless the partnership has 751 property, in which case the partner will treat a portion of the gain as ordinary income to the extent of the gain attributable to such property. Section 751 property (commonly referred to as “hot assets”) consists of unrealized receivables, including depreciation recapture, and inventory.

In conformity with IRC § 741, when a nonresident sells a partnership interest in a partnership, California generally treats the transaction as the sale of an intangible capital asset sourced to the state of the seller’s residence, unless the intangible has acquired a business situs in California.

However, if the partnership has 751 property at the time of the sale, the sale of the partnership interest must be treated as two distinct transactions: one in which the intangible partnership interest is sold by the partner, and one in which the underlying 751 property is treated as sold by the partnership immediately before the partner disposes of its interest, leading to a deemed distribution to the partner.

Therefore, the gain attributable to the 751 property will be treated as business income. If the partnership conducts 100% of its business in California, then the gain will be treated as California-source income. If the partnership conducts business inside and outside California, then the gain on the deemed sale of the IRC 751 property will be sourced according to California’s apportionment rules.[1] As a result, a nonresident may be required to pay income tax to California on a portion of the gain attributable to 751 property if the partnership conducts business in the state.[2]

The bottom line

Aprio’s SALT team has experience advising individuals who are selling their businesses. We can assist your business with identifying potential multistate tax issues and provide alternative transaction structures in order to minimize any multistate tax liabilities. 

We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the July 2022 SALT newsletter.

[1] See Cal. Rev. & Tax Code sections 25120 to 25139, pursuant to Regulation section 17951-4(d)(1).

[2] This ruling does not really have any bearing on a resident, since a resident will generally report all gains to California on the sale of a partnership interest.


Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Jeff Glickman

Jeff Glickman is the partner-in-charge of Aprio, LLP’s State and Local Tax (SALT) practice. He has over 18 years of SALT consulting experience, advising domestic and international companies in all industries on minimizing their multistate liabilities and risks. He puts cash back into his clients’ businesses by identifying their eligibility for and assisting them in claiming various tax credits, including jobs/investment, retraining, and film/entertainment tax credits. Jeff also maintains a multistate administrative tax dispute and negotiations practice, including obtaining private letter rulings, preparing and negotiating voluntary disclosure agreements, pursuing refund claims, and assisting clients during audits.