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. IN OREGON 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. 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. |