For a period of two years, S-corps and partnerships may elect to pay tax at the entity level, rather than the personal.
In July 2021, Oregon established an elective Pass-Through Entity Tax (PTE-E), a business alternative income tax in response to the $10,000 cap on the federal State and Local Tax (SALT) deduction added in the 2017 federal Tax Cuts and Jobs Act. Twenty-two states, including Oregon, have followed suit to offer taxpayers some SALT cap relief – not all state programs are the same.
For tax years beginning on or after January 1, 2022, until the end of 2023, entities taxed as S-corporations (including LLCs with an S-election) and partnerships may elect annually to pay tax on their Oregon-source income at the entity level. The tax expense then reduces ordinary business income passed through to members. The PTE will pass a refundable tax credit out to owners to be used against Oregon personal income tax.
By making this election, the first $250,000 of distributive proceeds is taxed at 9%, and any amount exceeding $250,000 is tax at 9.9%.
To qualify for this election, all members/owners of the pass-through entity must be individuals, grantor trusts, or pass-through entities that are owned entirely by individuals subject to personal income tax – and all members of the PTE must consent. Qualifying members of an electing PTE are eligible for a credit equal to 100 percent of the member's distributive share of the PTE-E tax paid.
HOW TO REGISTER AND PAY
An entity must first register with the Oregon Department of Revenue to make quarterly payments for the PTE-E tax. (Under Register, click on “Register for a business tax,” then select PTE-Elective.) However, note that the estimated tax payment does not constitute the “election”, which is officially made with the originally filed return that is due in March 2023.
Timely estimated tax payments are required to avoid underpayment penalties for this election. The first payment for 2nd quarter was due June 15 (however the announcement was not made until just prior to that date) and calls for 50% of the tax due – essentially 1st and 2nd quarter payments combined). This payment can still be made now, and it is possible to request that the state transfer any estimate amounts made personally to the entity. Subsequent estimated payments will be due September 15, 2022 (additional 25%) and January 15, 2023 (final 25%).
Find FAQs and a PTE-E registration training document to walk you through the steps on the Oregon Department of Revenue’s Pass-Through Entity - Elective Tax page.
SOME DOWNSIDES TO CONSIDER
While these workarounds can potentially create a large federal tax benefit for a number of taxpayers, there may be downsides to consider. Before opting in, we recommend a consultation to take a close look at how the potential tax benefits would impact all owners. Things to consider include income in multiple states – the availability to claim other state tax credits in conjunction with the PTE Tax and not all states allowing for the SALT workaround credit to be refunded – which could have negative consequences for some, and the potential need to report the state income tax refund as income in the following year if it represents an increase to wealth.
TAX PLANNING CONSULTING
If you need guidance on whether this workaround is right for your company, we encourage you to contact our office to schedule a tax planning consultation with Rob Crow, CPA.
We know you’re concerned for your business and confused by all the new legislation and relief programs being established to help small businesses stay afloat during this unprecedented COVID-19 pandemic. We’ve fielded numerous inquiries from our clients over the past few days, and to help answer those questions we are providing this summary of the resources as we understand them. Keep in mind, the landscape is fluid and ever changing, and we will continue to monitor the information so we can assist you in navigating the available options that apply to your business. Some programs offer immediate assistance, while others involve credits available on your 2020 tax filings.
Expect delays for unemployment benefits and SBA loans. Given the historical volume of applications, these entities are being overwhelmed on a daily basis. Some people have resorted to applying in the middle of the night to get applications through. Be prepared to wait 4 weeks or more before receiving actual checks. And unfortunately, the line is likely to only get longer.
Local Business Support
National Coronavirus Aid, Relief, and Economic Security (CARES) Act
National Families First Coronavirus Response Act
The United States has enacted the Families First Coronavirus Response Act, which requires employers with fewer than 500 employees to provide paid leave to employees who are impacted by COVID-19 and offer tax credits to employers that do so. The law takes effect on April 1 and expires on Dec. 31, 2020. Notification must be given to employees.
The law contains three sections of particular interest for employers:
We hope this summary has helped inform your understanding of the options and resources available at this time. This relief legislation is one of the largest bills in US history and since it just passed, everyone is doing their best to decipher and implement its various components. Our team is working hard to interpret and explain the information to you and assist you with your business-specific questions, as well as complete 2019 tax filings for both our business and individual clients. We appreciate your patience and understanding as we all navigate a year we will certainly never forget.
Please take care of yourselves, your families, your employees, and your customers during this difficult time. We are all in this together.
Now’s the time to lower your 2019 tax liability through our strategic year-end tax planning services.
We’ll meet to discuss your current situation, analyze pertinent information, and provide actionable recommendations for any last-minute steps you can take before the end of the year to avoid tax bombshells and save money come tax time.
Year-end tax planning is beneficial for:
Have you had any major changes to your circumstances this year? Significant gains in investments? An inheritance? Marriage or divorce? A new baby, or children you can no longer claim? Real estate transactions? Or do you just want to make sure you’re minimizing your tax liability as best you can? Let’s make sure you’re finishing out 2019 strong and set you up for a great start to 2020 with the proper withholdings from day one. Learn more about individual tax planning. (Tax planning for individuals is based on an hourly rate and typically ranges from $250 to $500, depending on your situation.)
Was this a strong year for your company? Are you taking advantage of all the credits available to you? Maximizing retirement contributions? Making major purchases or buying supplies this year instead of waiting until next? Real estate or equipment transactions? Are you operating under the best business entity type going into next year? Learn more about business tax planning. (Tax planning for businesses is based on an hourly rate and typically ranges from $400 to $800, depending on the size and scope of your entities.)
Save yourself the headache of tax surprises by taking advantage of credits, deliberate charitable contributions, tactical purchases, retirement planning, and a variety of other strategies available to you for just one more month.
Give yourself the best holiday gift this year – peace of mind come tax time.
To schedule: With only a few weeks left before the holidays, please reach out to schedule year-end tax planning by Dec. 3. You can call our office at 503-821-2868 and choose extension 103 for our new office coordinator, Renae Grams, or email her at firstname.lastname@example.org.
Individual Development Accounts, or IDAs, are matched savings accounts that change the financial futures of qualifying Oregonians with lower incomes. When you donate to the Initiative, you receive a state tax credit that can be used to offset your Oregon income tax liability.
NEW: Donors can now choose their own tax credit rate – up to 90%. Why choose a lower tax credit rate? The lower the tax credit rate, the greater the impact of your contribution and the more you can claim as a charitable deduction on your federal return. Keep in mind, you may only claim the portion of your donation for which you do not receive a state tax credit. So, for example, if you choose a 90% state tax credit rate, you may claim 10% as a charitable contribution on your federal return. If you choose a 60% state tax credit rate, you may claim 40% as a charitable contribution on your federal return.
One thing that sets the IDA apart from other programs is the ability to contribute appreciated stock. For a taxpayer with highly appreciated stock, the overall tax savings can be significant.
Learn more about the IDA tax credit.
And be sure to consult with us if you have any questions about choosing a tax credit rate that best offsets your tax liability.
Keep in mind, this new tax will be in addition to any corporate taxes your business is currently paying and will be based on different receipts than used for state income tax purposes. Oregon’s House Bill (HB) 3427A passed the Senate on May 13, 2019, and was signed by the governor on May 16, 2019. The new law, dubbed the “Student Success Act,” is projected to raise nearly $2 billion per biennium for Oregon schools by imposing a new corporate activity tax (CAT) based on a taxpayer’s Oregon-sourced commercial activity.
How is it calculated?
While a taxpayer’s first $1 million of Oregon receipts will be exempt from the tax, all impacted taxpayers will face a $250 minimum tax. And a 0.57% tax will be imposed on taxable commercial activity over $1 million – less a 35% reduction for the greater of the cost of materials or labor. The apportioned subtraction cannot exceed 95% of Oregon receipts. This will be an annual tax with quarterly estimated tax payments imposed on the seller, not the purchaser. It will be based on gross receipts and would be due regardless of a taxpayer’s profitability.
Who does it impact?
In spite of being labeled a corporate activity tax, it applies to nearly all forms of business across every industry:
However, there are exclusions for not-for-profit and government entities, hospitals and residential care facilities, and credit unions.
The CAT is imposed upon businesses considered to have “substantial nexus” in Oregon, which includes both traditional physical presence and “bright line presence” economic nexus criteria – the latter meaning at least $50,000 in Oregon payroll or property, $750,000 in Oregon sales, or a minimum of 25% of total payroll, property, or sales in the state.
Is all commercial activity taxed?
Taxable commercial activity includes services, real property, tangible property, and intangible property sourced to Oregon. However, there are 43 types of income excluded from the CAT, which include:
And exemptions are available for basic necessities and agricultural products.
When does it take effect?
The new tax will go into effect for tax years beginning on or after January 1, 2020. Until the Oregon Department of Revenue issues related rules and regulations, the specific application of the law will not be fully known.
How can we help you?
We’re here to help you analyze your business activities and determine if they are subject to the new Oregon CAT. Keep in mind, this new tax will be in addition to any corporate taxes your business is currently paying and will be based on different receipts than used for state income tax purposes. There will likely be an economic impact to your business with this new tax and we recommend you schedule a time to sit down with us now so we can look at your gross receipts and costs in relation to the new tax and start planning for your business’ future.
The IRS is changing paycheck withholding,
and it'll be a doozy...
After extreme backlash to the withholding table changes that caused countless Americans to owe big bucks to the IRS for 2018, get ready for some significant changes to the W-4 for next year. While the IRS seeks to eliminate large payments or refunds, the proposed solution will spell big headaches for employers and employees alike. What will it mean for you? See what's in store for the W-4.