Ohio Offers Business Incentives with New 2026 Capital Gains Deductions

Two new Ohio capital gain deductions are now available to qualifying business owners and certain venture capital investors that sell ownership interest in an Ohio business. These provisions were previously signed into law on July 1, 2021, as part of the 2022-2023 Biennium Budget Bill (HB 110), but only became effective in 2026.

The deductions are part of the state’s broader goal to encourage Ohio business investment. As such, business owners should consider the potential impact on transactions and gains recognized beginning this year.

Capital Gains Deduction on the Sale of an Ohio Business

Ohio will provide an income tax deduction to taxpayers with capital gains on the sale of their ownership interest in an Ohio headquartered business. It is important to note this deduction is not available on an asset sale transaction. As such, sellers should be prepared to contemplate when an equity sale could provide a lower effective tax rate.

How Do You Qualify for the Ohio Capital Gains Deduction?

A qualifying owner must sell an equity interest where they:

• Materially participated in the business for the five years immediately preceding a sale, or
• Directly or indirectly made a venture capital investment of at least $1 million dollars.

Further, a qualifying owner must sell an interest in a qualifying Ohio business. For the five years immediately preceding a sale, the Ohio business must have been:

• Headquartered in Ohio, and,
• Incorporated, registered or organized in Ohio.

How Big is the Potential Ohio Capital Gains Deduction?

The Ohio capital gains deduction is the lesser of 1) the owner’s capital gain or 2) the business’ “deductible payroll.”

Each qualifying owner’s share of deductible payroll is computed based on their investment type and ownership percentages:

• For owners qualifying under the material participation requirement, the specified payroll period is the five calendar years preceding a sale;
• For owners qualifying as a venture capital investment, the payroll period includes the owner’s investment period not to exceed the five calendar years immediately preceding a sale.
• Amounts paid to qualifying owners or relatives are excluded from these payroll calculations.

Are Capital Gains Also Eligible for the Ohio Business Income Deduction?

Depending on an owner’s facts and circumstances, their capital gains may also be eligible for Ohio’s business income deduction. Qualifying owners must first claim a qualifying Ohio capital gains deduction before applying Ohio’s business income deduction of up to $250,000 when single/married filing joint ($125,000 married filing separate) on any remaining capital gains when included as part of business income on an owner’s Ohio personal income tax return.

Capital Gains Deduction for Investors in Ohio Venture Capital Operating Companies

Designed to spur further investment in Ohio businesses by Ohio-based venture capital operating companies (VCOCs) beginning in 2026, Ohio will provide a capital gains deduction to qualifying VCOCs.

How Can Your Venture Capital Operating Company Receive Ohio VCOC Certification?

An Ohio VCOC must be certified by the Ohio director of development. To be approved, the VCOC must certify it:

• Manages or maintains capital commitments of at least $50 million in active assets, and
• At least two-thirds of its managing and general partners are Ohio residents.

Once certified, the Ohio VCOC’s certification is valid for as long as the company meets the requirements as an Ohio VCOC. The VCOC must annually file an information report disclosing its investors and investments with both the Ohio director of development and the tax commissioner.

What is an Ohio VCOC Investment?

The IRS defines an Ohio VCOC as an investment fund that:

• Invests at least 50% of its assets, valued at cost, in operating companies or derivative investments in which the fund has or obtains management rights; and
• Actually exercises management rights to substantially participate in or influence the conduct of one or more of the operating entities in which it invests.

Qualifying investors must make an investment of cash, cash equivalents or the provision of services to an Ohio VCOC during the period it is certified. In addition, an Ohio VCOC must invest in an Ohio business defined as a:

• Business headquartered in Ohio, and
• Business that employs more than 50% of its full-time equivalent employees within Ohio.

How Much of a Deduction Can an Investor in an Ohio VCOC Receive?

The allowable capital gains deduction by a qualifying investor in a certified Ohio VCOC is:

• 100% of the capital gains attributable to investments in Ohio businesses, and
• 50% of the capital gains attributable to investments in all other businesses.

Are Capital Gains Also Eligible for the Ohio Business Income Deduction Priority?

An owner receiving capital gains that qualify as business income must first apply Ohio’s business income deduction up to $250,000 when single/married filing joint ($125,000 married filing separate) before applying any excess eligible under the Ohio VCOC capital gains deduction.

Ohio law also includes clawback provisions, requiring an add-back of any capital gains deducted previously but later deemed nonqualifying, or if a VCOC is later notified it failed to receive a director’s certification.

Ohio continues to encourage investment, lowering tax rates and offering additional income deductions to owners investing in the state. Owners and investors must evaluate when these new deductions are available to reduce their Ohio effective tax rates in 2026 and beyond, as well as when considering future investments and structuring of business sales.

Contact Hannah Prengler, Karen Raghanti or a member of your service team to discuss this topic further.

In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.