QSBS in Ohio: SB 9 Conformity, 2.75% Flat Rate, and What Columbus Healthcare IT, Cleveland Medtech, and Cincinnati Fintech Founders Need to Know
Ohio Senate Bill 9 (signed March 5, 2026) updated Ohio's IRC conformity date to March 5, 2026, capturing the One Big Beautiful Bill Act's §1202 enhancements — the $15M exclusion cap, the tiered 3/4/5-year exclusion schedule at 50/75/100%, and the $75M gross assets threshold for stock issued after July 4, 2025. At Ohio's flat 2.75% income tax rate — one of the lowest among states with an income tax that conform to §1202 — the exclusion eliminates up to $412,500 in Ohio state tax on a qualifying $15M exit, on top of more than $3.5M in federal tax savings at the 5-year mark. Ohio's city income taxes do not apply to capital gains from stock sales, so Columbus, Cleveland, and Cincinnati founders owe no city-level tax on QSBS gain regardless of local income tax rates. Columbus healthcare IT founders face the §1202(e)(3)(A) health exclusion analysis — the line between software tools for healthcare and clinical care delivery matters enormously. Cleveland's medical device and biotech companies are generally well-positioned. Cincinnati's insurance, banking, and financial services adjacency creates §1202(e)(3)(B) excluded-industry risk for founders in that ecosystem.
Ohio's §1202 conformity via Senate Bill 9: what the March 2026 update means for Ohio founders
Ohio conforms to the Internal Revenue Code through a periodic static conformity mechanism — the state adopts the federal IRC as of a fixed date, updated each time the legislature passes a conformity bill. Ohio Revised Code § 5701.11 defines "internal revenue code" by reference to the IRC as amended to a specific date.1
Senate Bill 9, signed by Governor Mike DeWine on March 5, 2026, updated Ohio's IRC conformity to March 5, 2026 and incorporated all federal tax law changes effective after March 7, 2025 — which includes the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025. Ohio's SB 9 conformity update specifically captures OBBBA's §1202 changes:1
- The exclusion cap increase from $10M to $15M per taxpayer per issuer, for stock issued after July 4, 2025
- The tiered exclusion schedule — 50% at 3 years, 75% at 4 years, 100% at 5 years — replacing the prior all-or-nothing 5-year cliff, for stock issued after July 4, 2025
- The gross assets threshold increase from $50M to $75M (with annual inflation adjustments starting after 2026), for stock issued after July 4, 2025
Ohio's conformity is static — it adopts the IRC as of the SB 9 date rather than automatically tracking future federal amendments. If Congress further amends §1202 after March 5, 2026, those changes will not automatically flow into Ohio law; another Ohio conformity bill would be required. This contrasts with rolling-conformity states like Illinois and Connecticut, where future federal §1202 amendments apply automatically. In practice, Ohio's legislature has updated conformity regularly, and SB 9 itself was passed to capture the large legislative cycle that included OBBBA — but Ohio founders should monitor for future conformity legislation if Congress makes additional §1202 changes.
Ohio has not decoupled from §1202 in any legislation through October 2026. Unlike California (which repealed its §1202 conformity in 2013), Pennsylvania (which never conformed), or Oregon (which decoupled retroactively in April 2026), Ohio recognizes the full §1202 exclusion at the state level for qualifying exits. Pre-OBBBA stock (issued before July 5, 2025) benefits from the prior rules: 100% exclusion at 5 years, $10M cap or 10× basis (whichever is greater), $50M gross assets threshold. Post-OBBBA stock (issued after July 4, 2025) benefits from the tiered schedule and higher caps captured by SB 9. See the OBBBA QSBS guide for the full pre/post comparison.
| Feature | Pre-OBBBA stock (issued ≤ July 4, 2025) | Post-OBBBA stock (issued ≥ July 5, 2025) |
|---|---|---|
| Exclusion cap per taxpayer per issuer | $10M (or 10× adjusted basis if greater) | $15M (or 10× adjusted basis if greater) |
| Minimum holding period for any exclusion | 5 years (all-or-nothing cliff) | 3 years (tiered schedule begins) |
| 3-year hold exclusion | 0% | 50% |
| 4-year hold exclusion | 0% | 75% |
| 5-year hold exclusion | 100% | 100% |
| Gross assets at issuance threshold | ≤ $50M | ≤ $75M (inflation-adjusted after 2026) |
| Ohio conformity? | Yes — captured by SB 9 | Yes — OBBBA captured by SB 9 (Mar 2026) |
Ohio's 2.75% flat rate and what Section 1202 saves Ohio founders
Ohio House Bill 96, signed into law in 2025 and effective for tax year 2026, reduced Ohio's individual income tax to a flat 2.75% rate on nonbusiness income above $26,050. Capital gains are taxed as ordinary income in Ohio — there is no separate long-term capital gains rate. For QSBS founders, the Ohio flat rate means the entire excluded gain (net of the $26,050 exempt threshold, which is immaterial on a multi-million-dollar exit) is subject to 2.75% Ohio tax absent the §1202 exclusion.2
The §1202 exclusion eliminates Ohio income tax entirely on the excluded gain:
- Pre-OBBBA $10M qualifying exit (5-year hold, $100K basis): Ohio state tax savings = $10M × 2.75% = $275,000
- Post-OBBBA $15M qualifying exit (5-year hold): Ohio state tax savings = $15M × 2.75% = $412,500
These amounts stack on top of the federal tax eliminated by the exclusion. Federal LTCG at 20% plus NIIT at 3.8% on a fully excluded $15M gain eliminates approximately $3,570,000 in federal tax at the 5-year mark. The combined federal-plus-Ohio benefit on a $15M post-OBBBA qualifying exit exceeds $3.98 million in total tax eliminated for an Ohio-resident founder.
Ohio's 2.75% rate is the lowest state income tax rate among all conforming states with a meaningful startup ecosystem. For comparison: Illinois (4.95% flat), Colorado (4.4% flat), North Carolina (3.99% flat), Georgia (4.99% flat), Utah (4.45% flat), Michigan (4.25% flat). Ohio's state savings on a $15M exit are lower in dollar terms than most of these peers — but the 2.75% rate means Ohio founders are already in a highly favorable income-tax position relative to the states where most startup activity is concentrated.
Ohio city income taxes do not apply to QSBS gains
Columbus, Cleveland, Cincinnati, and most other Ohio cities impose local income taxes — Columbus at 2.5%, Cleveland at 2.5%, Cincinnati at 1.8%. However, Ohio's municipal income tax statute (Ohio Revised Code Chapter 718) limits the municipal income tax base to wages and salaries, and net profits of businesses. Capital gains from the sale of personal investment assets — including stock — are not wages and are not business net profits; they are excluded from Ohio's municipal income tax base.2
A Columbus founder with a $15M QSBS exit owes 2.5% Columbus city income tax on wages and business income — but $0 city income tax on the QSBS capital gain, whether fully excluded under §1202 or not. This distinguishes Ohio from New York City, where NYC residents pay city income tax of up to 3.876% on most taxable income including capital gains. An Ohio founder's state-and-local income tax burden on a QSBS gain is entirely the Ohio flat rate — and $0 under full §1202 exclusion.
Columbus healthcare IT: the §1202(e)(3)(A) health exclusion analysis
Columbus is Ohio's largest startup ecosystem, with a concentration in healthcare technology, insurtech, and fintech. The city's profile — home to Nationwide Children's, OhioHealth, and Mount Carmel health systems plus a large insurance sector anchored by Nationwide Insurance — has produced a generation of healthcare IT and health-adjacent software companies. That same concentration creates meaningful §1202(e)(3)(A) excluded-industry risk.
IRC §1202(e)(3)(A) excludes businesses "in the field of health" — specifically those whose principal asset is "the reputation or skill of 1 or more of its employees." The provision targets clinical care delivery companies, not technology companies that serve the health sector.
Healthcare IT software: generally qualified
Columbus-area companies that build and sell software to healthcare organizations — without directly delivering clinical care to patients — are generally not excluded under §1202(e)(3)(A):
- Prior authorization and benefit investigation software: Companies building B2B tools that automate prior authorization workflows, formulary lookups, or patient benefit investigation for pharmacies, hospitals, and pharmaceutical manufacturers — where the company's revenue is from software licenses or SaaS fees — are in the technology field. The company's principal asset is its software platform and data, not the clinical skill of employee clinicians. Its customers receive health services; the company provides software tools to those who do.
- Revenue cycle management and claims automation: RCM software companies that sell billing automation, claims scrubbing, denial management, or coding tools to healthcare providers are generally in the software and data analytics field. The company processes data; clinicians deliver care. The §1202(e)(3)(A) exclusion turns on whether the company's principal asset is the health skill of its employees — not whether it serves healthcare clients.
- Health data analytics and population health platforms: Companies that aggregate, analyze, and visualize clinical or claims data for payers and health systems — where the product is the software platform and the company employs data engineers and data scientists, not licensed clinicians in patient-facing roles — are generally in the data and analytics field.
- Administrative health IT (EHR integrations, interoperability middleware, patient engagement apps): Software that connects health systems, enables patient communication, or routes clinical data between systems — where the company's value is in the integration technology, not in healthcare delivered to patients — is generally in the software field.
Clinical care delivery: excluded
Ohio healthcare companies that deliver clinical services to patients are excluded under §1202(e)(3)(A), regardless of their technology investment:
- Multi-specialty groups, physician practice management companies, and hospital management entities where the principal asset is the licensed clinicians rendering patient care
- Telehealth and virtual care companies whose primary revenue is from clinical encounters delivered by employed or contracted physicians, nurse practitioners, or therapists — especially where the company takes insurance reimbursement and the clinician is the product
- Behavioral health, physical therapy, and home health companies where licensed clinicians deliver the core service to patients
- Digital health companies with a hybrid model — offering both a software platform and clinical services — where clinical services revenue is a substantial portion of the business
Cleveland medical devices and biotech: generally well-positioned, with clinical-care exceptions
Cleveland's health innovation ecosystem — anchored by Cleveland Clinic's Global Cardiovascular Innovation Center, University Hospitals, Case Western Reserve University, and the BioEnterprise accelerator — has produced significant medical device and biotech activity. Cleveland Clinic Innovations licenses and spins out commercial ventures from research developed at the clinic. For QSBS purposes, device and pharma R&D companies from this ecosystem are generally well-positioned, but companies that deliver clinical services are excluded.
Medical device manufacturers: generally qualified
Ohio companies that design, develop, and manufacture FDA-cleared medical devices — cardiovascular monitoring devices, orthopedic and surgical instruments, diagnostics hardware, wearables and remote monitoring equipment — are primarily manufacturers and technology companies. Their principal asset is proprietary device design, manufacturing capability, and IP — not health skills rendered to patients. §1202(e)(3)(A) does not exclude device manufacturers whose business is manufacturing, not care delivery.
Pharma and biotech R&D: generally qualified
Ohio-based pharmaceutical and biopharmaceutical companies conducting preclinical or clinical-stage drug development — where the company's value is in its pipeline, IP, and scientific platform — are not in the health services field for §1202(e)(3)(A) purposes. A preclinical-stage drug company's principal asset is its drug candidates and the science underlying them, not the clinical skill of company employees rendering health services to patients. Ohio's strong biotech base in Cleveland and Columbus can qualify, provided the other §1202 tests (C corporation, gross assets, original issuance, active business test) are met.
Cleveland Clinic spinouts and academic commercialization: review required
Cleveland Clinic Innovation creates and spins out commercial companies from clinic-developed technology. Spinout companies that commercialize medical devices, diagnostics, software, or drug candidates — structured as independent C corporations — can potentially qualify for §1202 treatment if all qualification tests are met at the time of original issuance. However, spinout equity arrangements (including licensing companies, royalty-interest vehicles, or entities whose principal business is collecting royalties from the clinic rather than operating an active business) require careful §1202(e)(3) and active-business-test review. The 80% active business test requires that at least 80% of company assets be used in the active conduct of a qualified trade or business — a pure IP licensing entity can fail this test even if its underlying IP comes from a qualifying field.
For a detailed analysis of how the §1202(e)(3)(A) health exclusion applies to specific company types, see the excluded industries guide.
Cincinnati insurance, banking, and fintech: the §1202(e)(3)(B) analysis
Cincinnati is home to major insurance (Fifth Third Bancorp, Western Southern Financial, Great American Insurance), consumer goods (Procter & Gamble, Kroger), and a growing fintech and insurtech startup layer. The insurance and banking concentration creates §1202(e)(3)(B) excluded-industry risk for Cincinnati-area founders.
IRC §1202(e)(3)(B) excludes businesses "in the field of banking, insurance, financing, leasing, investing, or similar financial services." The critical distinction is whether the company performs financial services or provides software and technology to companies that do.
Insurance carriers and banking institutions: excluded
Cincinnati-area founders holding equity in insurance carriers — licensed property/casualty, life, or health insurance companies that underwrite and bear insurance risk — hold shares in excluded businesses under §1202(e)(3)(B). This applies regardless of how technology-enabled the carrier's operations are. Similarly, shares in banks and other depository institutions are excluded. Founders of spinouts from insurance and banking parents need to verify that the spinout entity itself is not in the insurance or banking business — the exclusion is entity-specific, not parent-company-inherited, so a software spinout from an insurance parent that operates independently as a software company is not automatically excluded.
Insurtech software: generally qualified
Cincinnati insurtech companies that build and license software to insurance carriers — without holding insurance licenses or underwriting risk — are generally in the software field, not the insurance field:
- Policy administration systems (PAS), claims management software, and underwriting automation tools sold on a SaaS basis to carriers — where the company earns software revenue and the carrier bears the insurance risk — are generally technology companies.
- Distribution technology that helps agents or brokers quote and bind coverage faster — where the company earns technology fees and does not itself bind coverage or hold an MGA license — is generally in the technology field.
- An insurtech with a licensed MGA component — earning commission on premiums placed — is performing insurance distribution and faces §1202(e)(3)(B) exclusion risk for that activity. The analysis depends on whether the MGA function is the primary business or an incidental regulatory structure.
Procter & Gamble ecosystem and consumer goods tech: generally outside the financial services exclusion
Cincinnati's P&G ecosystem — including supply chain software, retail analytics, CPG marketing tech, and consumer product development companies — is generally outside the §1202(e)(3) excluded industries. Consumer goods companies, manufacturing companies, and software companies serving the CPG or retail sector are not in the health, finance, consulting, or other excluded fields. These companies must still pass the other §1202 qualification tests (C corporation, gross assets below threshold at issuance, 80% active business, original issuance to eligible shareholder, 5-year holding period) — but the industry-exclusion analysis is straightforward for most CPG-ecosystem startups.
Dayton defense and aerospace: the §1202(e)(3) consulting exclusion analysis
The Dayton area — anchored by Wright-Patterson Air Force Base and the National Air and Space Intelligence Center — has a large defense contracting and aerospace engineering ecosystem. Defense technology companies face the §1202(e)(3)(A) "consulting" or skill-of-employees exclusion analysis that applies to services-heavy government contractors.
§1202(e)(3)(A) excludes businesses "in the field of consulting" and businesses whose principal asset is "the reputation or skill of 1 or more of its employees." For defense and government contracting companies, the analysis turns on whether the company's principal asset is proprietary technology, manufacturing capacity, or government-cleared software — or instead the specialized skills and clearances of individual employees.
- Defense software and autonomous systems companies: Dayton-area companies that develop proprietary defense software — autonomous systems, sensor fusion algorithms, mission planning tools, ISR data processing software — where the product is licensed or sold to the government and the company's value is in its IP and platform, are generally in the technology field. The company's principal asset is the software or hardware system, not the personal consulting skill of any individual employee.
- Engineering services and SETA contractors: Systems Engineering and Technical Assistance (SETA) contractors whose primary deliverable is the hours and expertise of cleared engineers assigned to government programs — where the company's revenue is from labor-category contracts and the company's principal asset is the pool of individually cleared engineers — face heightened §1202(e)(3)(A) consulting-exclusion risk. When the product is the people rather than a proprietary system, the exclusion is more likely to apply.
- Aerospace manufacturing and MRO: Companies that manufacture aerospace components, airframe structures, or maintenance-repair-overhaul equipment — where the principal asset is manufacturing capability and proprietary process IP — are generally in the manufacturing field, not the consulting field.
For defense and aerospace companies, the distinction between a technology company that happens to serve government customers (generally qualifying) and a professional services company that happens to support defense programs (potentially excluded) requires factual §1202(e)(3) analysis with qualified tax counsel.
OBBBA's 28% rate trap for 3-year and 4-year holds in Ohio
Post-OBBBA stock (issued after July 4, 2025) benefits from a tiered exclusion — 50% at 3 years, 75% at 4 years, 100% at 5 years. This gives Ohio founders earlier liquidity options with partial exclusion. However, the non-excluded portion of §1202 gain is not taxed at the standard 20% long-term capital gains rate. Under §1(h)(4)(A)(i), partially excluded §1202 gain is subject to a maximum federal rate of 28% on the taxable portion. Ohio income tax at 2.75% also applies to the non-excluded portion.
| Hold period (post-OBBBA stock) | §1202 exclusion | Federal tax on taxable portion | NIIT (3.8%) | Ohio state tax (2.75%) | Total tax on $15M gain |
|---|---|---|---|---|---|
| 3 years | 50% ($7.5M excluded) | $2,100,000 (28% × $7.5M) | $285,000 | $206,250 | $2,591,250 |
| 4 years | 75% ($11.25M excluded) | $1,050,000 (28% × $3.75M) | $142,500 | $103,125 | $1,295,625 |
| 5 years | 100% ($15M excluded) | $0 | $0 | $0 | $0 |
| No QSBS (any hold) | 0% | $3,000,000 (20% × $15M) | $570,000 | $412,500 | $3,982,500 |
Pre-OBBBA stock (issued before July 4, 2025) still faces the original all-or-nothing 5-year cliff. A 4-year hold produces $0 exclusion; a 5-year hold produces 100% exclusion (up to the $10M cap or 10× basis). Ohio SB 9 captures the pre-OBBBA rules as well. See the OBBBA guide for the full rate-trap analysis and the holding period guide for how the clock starts for different equity types.
Ohio QSBS worked examples
Example 1: Columbus healthcare IT founder, pre-OBBBA stock, $8M exit, 5-year hold, $80K basis
| Total sale proceeds | $8,000,000 |
| Adjusted basis | $80,000 |
| Total gain | $7,920,000 |
| §1202 exclusion — 100%, 5-yr hold; 10× basis = $800K < $10M flat cap; full gain excluded | $7,920,000 |
| Federal capital gains tax | $0 |
| Federal NIIT (§1202-excluded gain is not net investment income) | $0 |
| Ohio income tax (excluded gain not in federal AGI; Ohio SB 9 conformity applies) | $0 |
| Columbus city income tax on capital gains | $0 (city income tax does not apply to capital gains) |
| Total tax on $8M exit | $0 |
Without §1202: federal LTCG at 20% = $1,584,000; federal NIIT at 3.8% = $300,960; Ohio at 2.75% ≈ $217,800. Total without QSBS: $2,102,760. This example assumes the healthcare IT company passes the §1202(e)(3)(A) qualified-trade-or-business test — its principal asset is its prior-authorization software platform and data, not clinical skills rendered by company employees to patients.
Example 2: Cleveland medtech founder, post-OBBBA stock issued September 2025, $15M exit, 5-year hold
| Total gain | $14,950,000 |
| §1202 exclusion — 100%, 5-yr hold, OBBBA $15M cap covers full gain | $14,950,000 |
| Federal capital gains tax | $0 |
| Federal NIIT | $0 |
| Ohio income tax (SB 9 captures OBBBA $15M cap) | $0 |
| Total tax on $15M exit | $0 |
Without §1202: federal LTCG + NIIT ≈ $3,581,000; Ohio at 2.75% ≈ $411,125. Total without QSBS: $3,992,125. This example assumes the medtech company designs and manufactures FDA-cleared cardiac monitoring devices — its principal asset is device IP and manufacturing capability, not clinical health services rendered by company employees to patients.
Example 3: Post-OBBBA stock, Columbus fintech software founder, $15M exit, 4-year hold — 28% rate trap
| Total gain | $14,950,000 |
| §1202 exclusion at 75% (4-year OBBBA tier, $15M cap) | $11,212,500 |
| Non-excluded gain (25%) | $3,737,500 |
| Federal tax at 28% maximum rate — §1(h)(4)(A)(i) applies to partially excluded §1202 gain | $1,046,500 |
| Federal NIIT at 3.8% on non-excluded gain | $142,025 |
| Ohio income tax at 2.75% on non-excluded $3,737,500 | $102,781 |
| Total tax at 4-year hold | $1,291,306 |
Waiting one more year to the 5-year mark eliminates all $1,291,306 in tax. Ohio income tax on the non-excluded 25% ($102,781) is recovered entirely at year 5. The federal 28% rate trap is the dominant cost at year 4. See the OBBBA guide for the full rate-trap analysis and the QSBS exclusion calculator to model your holding period scenarios.
Example 4: Cincinnati CPG tech founder, $25M exit above the $15M OBBBA cap, 5-year hold, $250K basis
| Total gain | $24,750,000 |
| §1202 exclusion — 100%, 5-yr hold, OBBBA $15M flat cap (10× basis = $2.5M < $15M cap) | $15,000,000 |
| Taxable gain (above $15M cap) | $9,750,000 |
| Federal LTCG at 20% on taxable gain | $1,950,000 |
| Federal NIIT at 3.8% on taxable gain | $370,500 |
| Ohio income tax at 2.75% on $9.75M taxable gain | $268,125 |
| Total tax on $25M exit with §1202 | $2,588,625 |
Without §1202 on the same $24.75M gain: federal LTCG + NIIT ≈ $5,886,000; Ohio at 2.75% ≈ $680,625. Total without QSBS: $6,566,625. The §1202 exclusion saves $412,500 in Ohio state tax on the $15M excluded portion plus $3,565,500 in federal tax — a combined savings of $3,978,000. If basis exceeds $1.5M, the 10× basis alternative (§1202(b)(1)(A)) could increase the exclusion beyond $15M. Use the QSBS exclusion calculator to model the basis-cap comparison. Assumes the CPG technology company passes all §1202 qualification tests.
Ohio versus peer states: QSBS comparison
| Feature | Ohio | California | Texas | Illinois | Michigan | Pennsylvania |
|---|---|---|---|---|---|---|
| §1202 exclusion at state level? | Yes — SB 9 (Mar 2026) captures OBBBA | No — repealed 2013; full gain taxable | Yes — no state income tax, fully effective | Yes — rolling conformity, auto-adopts OBBBA | Yes — but static Jan 1 2025 date; OBBBA not captured at state level | No — non-conforming; full gain taxable at 3.07% |
| State tax on QSBS-excluded gain? | $0 — at 2.75% flat rate | Full rate — up to 13.3% on full gain | $0 — no state income tax | $0 — rolling conformity | $0 on pre-OBBBA exclusion; OBBBA cap/tiering uncertain at state level | Full rate — 3.07% flat on full gain |
| Top marginal state rate (2026) | 2.75% flat (above $26,050) | 13.3% (income > $1M) | 0% — no state income tax | 4.95% flat | 4.25% flat | 3.07% flat |
| Conformity type | Static — updated to Mar 5, 2026 via SB 9; captures OBBBA | Non-conforming — repealed §1202 in 2013 | N/A — no state income tax | Rolling — auto-adopts all federal §1202 changes | Static — Jan 1, 2025 date predates OBBBA (July 4, 2025) | Non-conforming — never adopted §1202 |
| OBBBA $15M cap and tiered holding at state level? | Yes — SB 9 captures OBBBA | N/A — non-conforming | Yes — no income tax, no state-level gap | Yes — rolling conformity | No — static date predates OBBBA; MI still at $10M cap, 5-yr cliff, $50M threshold | N/A — non-conforming |
| Local income tax on capital gains? | No — Ohio city income taxes do not apply to personal capital gains | Some CA cities have local taxes; CG generally taxable at state level | No local income tax | Chicago: no city income tax on CG | Detroit: 2.4% city income tax does not apply to capital gains (same mechanism as Ohio) | Philadelphia SIT applies to some investment income; LTCG generally exempt |
| State savings on $15M §1202 exclusion | ~$412,500 | $0 (non-conforming — full 13.3% applies = $1,995,000 CA state tax) | $0 (no income tax to save) | ~$742,500 | ~$425,000 (on $10M pre-OBBBA cap; OBBBA $15M cap uncertain at state level) | $0 (non-conforming — full 3.07% applies = $460,500 PA state tax) |
Ohio's combination of a low flat rate (2.75%) and SB 9 conformity — including OBBBA's $15M cap and tiered exclusions — places it among the most favorable income-tax states for QSBS planning in the Midwest. Michigan conforms to §1202 at the base rules but its pre-OBBBA conformity date means the new cap and tiered schedule may not apply at the state level for post-July 2025 stock. Illinois (rolling conformity, 4.95%) and Ohio (static SB 9 conformity, 2.75%) are the strongest options in the Midwest among states with income taxes. See the Michigan QSBS guide for the OBBBA conformity gap analysis and the Illinois guide for the rolling conformity comparison.
Planning priorities for Ohio founders
1. Confirm the §1202(e)(3) excluded-industry question for Columbus healthcare IT, Cincinnati fintech/insurance, and Dayton defense companies
Ohio's §1202 conformity only eliminates state tax if the company's stock actually qualifies under the qualified-trade-or-business test. Columbus healthcare IT founders need to confirm whether their company's principal asset is software and data (generally qualifying) or clinical health skills rendered to patients (excluded under §1202(e)(3)(A)). Cincinnati founders in insurance, banking, or financial services adjacency need to confirm whether the company provides software to financial institutions (generally qualifying) or performs the regulated financial services itself (excluded under §1202(e)(3)(B)). Dayton defense founders need to distinguish proprietary technology companies from consulting-intensive SETA contractors. Get a written §1202(e)(3) opinion from qualified tax counsel before any gifting, trust planning, or holding-period optimization. See the excluded industries guide for the statutory framework.
2. Verify all eight qualification tests at issuance — not at the time of sale
The §1202 exclusion depends on facts at the moment shares were issued. C corporation status, gross assets below $50M (pre-OBBBA) or $75M (post-OBBBA) at issuance, the active 80% business test, original issuance to an eligible shareholder, and the holding period must all be satisfied at the time of original issuance. Ohio founders who received shares through an LLC-to-C-Corp check-the-box election, a statutory entity conversion, or an S-Corp termination must verify that the conversion date — not the original LLC unit or S-Corp share grant date — is the holding period clock-start, and that gross assets were below the applicable threshold at the conversion date. See the Section 1202 checklist and the LLC and S-Corp guide.
3. Reach the 5-year mark for post-OBBBA stock before any sale
On a $15M post-OBBBA exit, the difference between a 4-year hold and a 5-year hold is $1,291,306 in total taxes — including $103,125 in Ohio state tax that goes to zero at year 5. At Ohio's 2.75% rate, the Ohio state component is smaller than in higher-tax states, but the federal 28% rate trap on the non-excluded 25% at year 4 is the dominant cost. If a transaction timeline has any flexibility — whether an acquisition letter of intent, a tender offer window, or an IPO lockup expiry — the holding period math should inform the calendar before any binding commitment is made. Use the QSBS exclusion calculator to model the year-by-year numbers for your position.
4. Plan gifting and trust structures before any transaction is signed
Ohio's SB 9 conformity to the OBBBA $15M cap means Ohio-resident donees have their own §1202 exclusion cap on gifted QSBS shares. A founder with a $45M qualifying QSBS gain who gifts shares to two Ohio-resident family members before signing a definitive agreement can potentially triple the available federal-plus-Ohio exclusion — eliminating tax on all $45M at the 5-year mark. The gift must occur before any binding obligation to sell; after a letter of intent or merger agreement is signed, anticipatory assignment of income rules apply and the tax benefit may be lost. See the gifting and stacking guide for timing rules and the trusts guide for non-grantor trust stacking strategies.
5. Monitor Ohio conformity if Congress further amends §1202
Ohio's static conformity mechanism means that future federal §1202 amendments (cap increases, threshold changes, new anti-abuse rules) do not automatically apply in Ohio. If Congress enacts additional §1202 changes after March 5, 2026 — the effective date of SB 9 — Ohio will not recognize them until the legislature passes another conformity update. Ohio founders should track federal §1202 developments and Ohio conformity legislation, particularly if a future Congress expands §1202 benefits further. For comparison, rolling-conformity states like Illinois and Connecticut capture future §1202 changes automatically. See the Illinois guide for the rolling-conformity comparison.
Talk to a QSBS advisor about your Ohio situation
Ohio's SB 9 conformity and 2.75% flat rate can eliminate up to $412,500 in Ohio state tax on a $15M qualifying exit — but the §1202(e)(3) excluded-industry analysis for Columbus healthcare IT, Cleveland medical device, Cincinnati fintech, and Dayton defense companies; the federal qualification tests; the OBBBA tiered holding period rules; and the gifting, trust, and estate planning window before a transaction all require professional review. A fee-only financial advisor who specializes in QSBS and founder liquidity can confirm qualification, model the full federal-plus-Ohio tax picture, coordinate the pre-transaction planning window, and integrate QSBS planning with investment policy and estate goals before the opportunity closes.
Sources
- Ohio IRC conformity — Ohio Revised Code § 5701.11 adopts the IRC as of a fixed date, updated periodically by legislation. Senate Bill 9, signed by Governor DeWine on March 5, 2026, updated Ohio's IRC conformity to March 5, 2026 and incorporated all federal IRC changes effective after March 7, 2025, including the One Big Beautiful Bill Act (OBBBA, enacted July 4, 2025) and its §1202 enhancements ($15M cap, tiered 3/4/5-year exclusion schedule, $75M gross assets threshold for post-July 4, 2025 stock). Ohio has not decoupled from §1202 through October 2026. Ohio Department of Taxation — Ohio Conformity Updates; EY Tax News — Ohio updates Internal Revenue Code conformity; QSBS Expert — Ohio Qualified Small Business Stock (QSBS) and Investor Tax Incentives.
- Ohio individual income tax rate 2026 — Ohio House Bill 96 reduced Ohio's individual income tax to a flat 2.75% rate on nonbusiness income above $26,050, effective tax year 2026. No preferential long-term capital gains rate. Ohio municipal income taxes (ORC Chapter 718) apply only to wages, salaries, and net profits of businesses; capital gains from personal stock sales are not in the municipal income tax base. Ohio Department of Taxation — tax.ohio.gov; Darkhorse CPA — Ohio Moves to a Flat Tax in 2026; Keystone Global Partners — 2026 QSBS by State: Eligibility Index.
- OBBBA §1202 enhancements and 28% rate trap — $15M exclusion cap (up from $10M), tiered 3/4/5-year exclusion schedule at 50/75/100% for stock issued after July 4, 2025, $75M gross assets threshold (up from $50M); non-excluded portion of partially excluded §1202 gain subject to maximum 28% federal rate via §1(h)(4)(A)(i). Baker Tilly — Changes to Section 1202, QSBS, in the One Big Beautiful Bill Act; Surgent CPE — Section 1202 QSBS 2026: OBBBA Changes & Eligibility Rules.
- §1202(e)(3) excluded-industry framework — §1202(e)(3)(A) excludes businesses in health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage whose principal asset is the reputation or skill of employees; §1202(e)(3)(B) excludes banking, insurance, financing, leasing, investing, and similar financial services. Analysis of software vs. care-delivery and software vs. financial-services distinctions derived from IRS field examinations and PLR guidance. Cornell LII — 26 U.S. Code § 1202 — Partial exclusion for gain from certain small business stock; QSBS Expert — Ohio QSBS and Investor Tax Incentives.
- Ohio startup ecosystem and state tax structure — Ohio Tax Foundation analysis, EY SALT newsletter, and tax practitioner guidance on Ohio's municipal income tax base (wages and net profits; personal investment capital gains excluded under ORC 718.01), school district income tax applicability to federal AGI-derived amounts, and Commercial Activity Tax inapplicability to individual capital gains. Tax Foundation — Ohio Full Expensing and OBBBA Conformity; Millan + Co. CPAs — Section 1202 QSBS Tax Guide (2026 Rules).
Values and legislative status verified as of October 2026. Ohio SB 9 (signed March 5, 2026) updated Ohio's IRC conformity to March 5, 2026, capturing the One Big Beautiful Bill Act's §1202 enhancements (enacted July 4, 2025) — $15M exclusion cap, tiered 3/4/5-year holding schedule at 50/75/100%, and $75M gross assets threshold for stock issued after July 4, 2025. Ohio individual income tax rate is 2.75% flat (2026) on nonbusiness income above $26,050. Ohio city income taxes do not apply to personal capital gains from stock sales. §1202(e)(3)(A) health exclusion and §1202(e)(3)(B) banking/insurance/financial services exclusion require review of specific company and shareholder facts by qualified tax counsel. Consult a fee-only financial advisor and qualified tax professional before relying on the §1202 exclusion for a specific transaction.