122:24-1-07 Tax considerations of eligible investors.

(A)

(1) Eligible investors are not limited to residents of the state of Ohio. Small business enterprises are required to make investments in property used within Ohio, creating a nexus with Ohio for purposes of taxation. The business income of a pass-through entity flows through to the equity investors as business income. Therefore, a qualifying investment to a pass-through entity under the investOhio program allows for an eligible investor to file a personal ohio income tax return and claim a nonrefundable tax credit under section 5747.81 of the Revised Code, after the requisite holding period has been met.

(2) For example, "Investor A", a Canadian citizen, makes a qualifying investment in a small business enterprise that is structured as a limited liability company that is treated as a partnership for federal income tax purposes. As such, "Investor A" is a member of a pass-through entity that has nexus with Ohio. Therefore, the business income of the small business enterprise will flow through to "Investor A" and retain its characteristic as business income in the hands of "Investor A." Because "Investor A" now has Ohio-sourced income, "Investor A" will be responsible for paying the Ohio tax on that income. By filing an Ohio personal income tax return as a non-resident, "Investor A" will be able to claim the investOhio credit on the Ohio personal income tax return.

(3) Eligible investors in a pass-through entity can only claim the nonrefundable credit on an Ohio personal income tax return. If an eligible investor has no other requirement to file an IT-1040 personal income tax return and would normally rely upon the pass-through entity to file a composite return on its behalf, the eligible investor must notify the pass-through entity that they are not to be included in any composite Ohio tax return (e.g., form IT-4708) that the entity may file.

(B)

(1) Nonresident eligible investors in a C corporation may or may not be able to claim the nonrefundable tax credit. Unlike pass-through entities, the business income of the C corporation does not flow through to the investor. The C corporation maintains its separate and distinct nature for taxation purposes. Therefore, in order to claim the nonrefundable tax credit, a non-resident would need to have Ohio-sourced income independent from the business income of the C corporation.

(2) For example, two non-resident "Investor A" and "Investor B", each make a one million dollar equity investment in "Corporation X", a C corporation. "Corporation X" has more than fifty per cent of its United States workforce in Ohio and uses the entire two million dollars to make, within six months of the investors' equity investments, expenditures that are authorized under division (A)(1)(c) of section 122.86 of the Revised Code. "Corporation X" does not issue any dividends to the investors during the holding period. The business income or loss of "Corporation X" does not flow through to its shareholders. Therefore, "Investor A" and "Investor B" will not receive any Ohio-sourced income from "Corporation X." "Investor A" does not have Ohio-sourced income from sources other than "Corporation X," whereas "Investor B" has Ohio-sourced income unrelated to "Corporation X." Under these facts, "Investor A" would not able to claim the investOhio credit whereas "Investor B" would be able to claim the credit. "Investor A" would be able to claim the credit, consistent with division (B) of section 5747.81 of the Revised Code if "Investor A" has Ohio-sourced income in one or more of the next seven succeeding taxable years.

Effective: 03/29/2012
R.C. 119.032 review dates: 03/29/2017
Promulgated Under: 119.03
Statutory Authority: 122.86(F)
Rule Amplifies: 122.86 , 5747.81
Prior Effective Dates: 11/8/2011 (Emer)