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.