The Oregon legislature closed the 2021 session on Saturday, June 26, 2021. This was a unique legislative session because Oregon saw strong, unexpected revenue for the biennium ending June 30, 2021.
The forecast flipped from a shortfall to a surplus and Oregon’s Legislative Revenue Office (LRO) now predicts a surplus kicker—returning as much as $1.4 billion to individual taxpayers. Oregon also stands to gain $2.7 billion in federal funds from the American Rescue Plan Act of 2021 (ARPA).
All told, Oregon had an ending balance sheet of over $4 billion in cash. This ultimately posed a challenge to those who sought tax increases based on the revenue shortfalls predicted in the early months of COVID-19.
This Alert details important tax and nontax bills that may have an impact on businesses operating in Oregon. These bills will become law unless Oregon Governor Kate Brown vetoes them.
Corporate Activity Tax (CAT) Technical Fix
Oregon Senate Bill (SB) 164 includes two significant changes to the CAT.
Fiscal-Year Filer Relief
SB 164 provides relief for fiscal-year filers. The CAT originally imposed calendar-year filings on all taxpayers, including fiscal-year filers, but SB 164 implements fiscal-year filing instead.
The transition for a calendar-year CAT taxpayer will require one short-year return covering the period January 1, 2021, through the last day of the fiscal year that ends in the 2021 calendar year. This short-period return will be due no later than April 15, 2022.
It’s important to note that fiscal-year filing will be mandatory; it isn’t an election.
Insurance Company Taxes
The bill also addresses a retaliatory tax issue for insurance companies that would have paid CAT on receipts taxed by other states, essentially double taxing them.
Internal Revenue Code (IRC) Reconnection
Oregon House Bill (HB) 2457 reconnects Oregon to the IRC as of April 1, 2021.
This legislation allows Oregon to incorporate all federal stimulus legislation, including ARPA, which is helpful to taxpayers and their advisors since Oregon was previously connected on December 31, 2018.
Reduced Pass-Through Rate Legislation
SB 139 eliminates the benefit of the reduced pass-through rate for businesses with pre-apportioned ordinary business income in excess of $5 million. The benefit remains and is slightly modified for those with $5 million or less of ordinary business income. The bill also increases the requirement for Oregon employment.
This will impact many businesses that operate as a partnership, S corporation, or LLC in Oregon.
This legislation is retroactive to January 1, 2021. Business owners that have previously taken advantage of this election will need to update their estimated tax payments based on the new rate schedule.
The new reduced pass-through entity rates available are as follows:
- 7% of the first $500,000 of taxable income
- 7.5% of taxable income exceeding $500,000 but not exceeding $1 million
- 8% of taxable income exceeding $1 million but not exceeding $2.5 million
- 9% of taxable income exceeding $2.5 million but not exceeding $5 million
- 9.9% of taxable income exceeding $5 million
While the legislature did cut rates for small and closely held businesses, it is unclear why the legislature chose to increase taxes for larger and more broadly held businesses that are coming out of the COVID-19 pandemic when those businesses are already experiencing substantial tax increases from the implementation of the CAT and other local tax regimes.
State and Local Tax Cap Deduction Workaround
Following the lead of several states, the legislature passed HB 727, a workaround to the $10,000 per year limitation on the deduction of state and local taxes (SALT) on personal income tax returns. The federal tax deduction limitation, known as the SALT cap, has been in effect since 2018. The SALT cap increased federal taxes on higher-income earners, especially those living in high-tax states such as Oregon, resulting in their state income and property taxes no longer being deductible beyond the cap.
Oregon’s SALT cap workaround allows members and owners of pass-through entities, such as S corporations and partnerships, to elect to have Oregon income taxes paid by the entity rather than passed through to the owners and members. This workaround is slightly more complex than the workarounds bills passed in other states.
It’s important to note that the election must be made each year, and that the legislature has directed the Oregon Department of Revenue to publish rules and procedures for making the election.
All owners or members of the pass-through entity must consent to make the election even though there was testimony requesting this requirement be lifted. This and other requirements of the election will restrict the number of pass-through businesses that are able to take advantage of the SALT cap workaround.
Certain tiered structures and pass-through entities that have more than individual ownership won’t be eligible for this election. There will also be a required modification on the individual tax return for the SALT deduction attributable to that member, partner, or owner of the pass-through entity to make the legislation revenue neutral to the state.
For example, a pass-through entity owned by individuals can make the election. A pass-through entity owned by individuals and an S corporation can also make the election if the S corporation is entirely owned by individuals. A pass-through entity owned by individuals and a C corporation wouldn’t be eligible for the election.
It’s uncertain why the legislature made qualifying for this election more restrictive than other states, including California. Hopefully this is addressed in the next legislative session as there’s little-to-no cost to the state for allowing the election to be made on an owner-by-owner basis.
Other Important Bills
Waived Employment Requirements
HB 2343 allows local jurisdictions to waive employment requirements for businesses impacted by COVID-19 and unable to meet the hiring requirements of their Enterprise Zone Agreements.
It’s then up to the zone administers’ discretion to waive these requirements through adopting a resolution. The resolution must establish a direct relationship between the financial distress of businesses and the COVID-19 pandemic.
HB 2343 also mandates that zone sponsors may not adopt a resolution later than June 30 immediately preceding the applicable property-tax year.
This potential relief is available for property-tax years beginning on July 1, 2021, and July 1, 2022.
Tax Credit Extensions
HB 2433 is the tax-credit extender bill, extending several programs. Notably the popular film tax-credit program has increased to $20 million annually. The biomass tax credit, on the other hand, was allowed to sunset.
Office of Taxpayer Advocacy
HB 3373 creates a new Office of Taxpayer Advocacy to assist businesses and individuals with complex tax issues and related support.
R&D Tax Credit
Although it wasn’t part of this session, there is a push from the business community to restore the popular R&D tax credit in the future.
Portland-Area Local Taxes
Although not part of the Oregon legislative session, recent updates and clarifications to the Metro Supportive Housing Services (SHS) and the Multnomah County Preschool for All (PFA) taxes have been published.
The SHS is a 1% tax on businesses and individuals. Businesses pay the tax on net income earned from sources within the Metro district, which covers parts of three counties:
Individuals who reside in the district pay the tax on their entire Oregon net income; nonresidents pay the tax on income from district sources. Individuals may subtract income, such as income from pass-through entities that pay the tax, from their tax bases.
The PFA tax, which ranges from 1.5% to 3.0% with a scheduled increase to 2.3% and 3.8%, respectively, affects individuals who live in Multnomah County or have income from sources in the county.
Subtractions are allowed for pass-through entity income that was subject to the Multnomah County Business Income Tax.
What This Means for Your Business
The recent clarifications apply to estimated tax payment requirements and apportionment, among other matters. The apportionment for businesses differs in significant ways from apportionment required by the State of Oregon, so businesses may want to review the rules in detail.
If the COVID-19 pandemic changed how your business operates, particularly with respect to remote work arrangements, your business apportionment calculation may look quite different from how it would have looked before the pandemic.
Business organizations led by the Portland Business Alliance brought suit against Metro on the grounds that Metro lacked the authority to impose a tax on businesses, and that to the extent business income was taxed, it was constrained to Oregon apportionment rules rather than the rules it adopted.
The Circuit Court judge ruled in favor of Metro. The ruling is likely to be appealed, but as of this writing, the SHS tax is in effect as enacted.
The permanent rules were also adopted July 7, 2021, for this new tax which is applicable starting January 1, 2021.
Tax Planning Considerations
With the passage of SB 727 and SB 139, it will be important to identify if your pass-through entity remains eligible for the reduced pass-through rates and if it can make the election under SB 727.
Several considerations are at play here, and a review of your ownership group, ownership structure, owner residence states, and other factors will help determine whether your entity may make the election and the extent of the tax benefit.
Eligible entities and their owners and members could realize significant savings on their federal income tax bills by making valid elections.
It appears that certain pass-through businesses and their owners may be able to take advantage of both elections, which will lead to welcome tax relief in one of the highest tax states.
As SALT cap workarounds now exist in several states, a multistate analysis may be needed.
We’re Here to Help
To learn more about how Oregon’s recent legislative changes may affect your business, contact your Moss Adams professional.