Oregon Pass-Through Entity Tax Election
November 11, 2022
Oregon is one of the many states that created a workaround for the Federal SALT deduction limitation of $10,000 created under the Tax Cuts and Jobs Act of 2017. The election was introduced under Senate Bill 727 in 2021. Subsequently, in the 2022 session, the legislature passed Senate Bill 1524, which provided for the requirement of estimates to be paid by an entity making the PTE-E election. The long-awaited proposed regulations regarding the Oregon Pass-Through Entity Tax Election (PTE-E) were released on October 25, 2022.
Of the proposed rules that were released in October 2022, several topics were covered. The current rules related to composite returns (Or. Admin. R. 150-314-0515) and nonresident withholding requirements (Or. Admin. R. 150-315-0520) were clarified. We will release a series of blog posts that focus on the several rules that were released. This first one will cover the requirements related to nonresident owners with Oregon source income from a pass-through entity that has elected to pay the federal tax liability at the entity level. The rules confirm that secondary withholding is not required with a PTE-E and the PTE-E credit can be claimed on a composite return.
In general, an entity with Oregon source income is required to pay withholding for nonresident shareholders, partners, or members of a pass-through entity unless that entity falls under one of the following exceptions.
- The owner elected to be included in a composite return
- The owner made estimated tax payments in the prior year and continues to make payments in the current year.
- There is a signed affidavit indicating that the owner will do their own withholding.
- The owner’s share of Oregon-sourced income is less than $1,000; or
- The entity is a publicly traded partnership
And the newly added exception:
- The pass-through entity elects to pay the pass-through entity tax at the entity level.
The withholding requirements are similar to the Pass-Through Entity Tax Election, in that the entity pays the tax on the owner’s share of the income earned in Oregon. However, the primary difference is that when the entity elects PTE-E, the owner will be allowed to reduce federal income tax liability. For withholdings, the amount of tax paid is considered a distribution and the tax expense is subject to the SALT deduction limitation on the individual’s tax return. Of primary consideration is that no withholding is required for any owners when an entity has made the Pass-Through Entity Election.
In Oregon, any number of nonresident owners can request to be included in a composite return. With a composite return, the entity prepares the tax filing on behalf of the owners. There are several limitations with a composite return, and the owner will be subject to Oregon’s highest individual income tax rate of 9.9%. When an entity makes the PTE-E, the new administrative rules confirm that when an individual makes the annual election to file a composite return, the pass-through entity can directly apply for the individual credit from the PTE-E on the composite form. The rule adds the PTE-E credit to the list of credits and deductions allowed on a composite tax return. Similar to withholdings, the composite tax liability is considered a distribution from the pass-through entity and the amount of tax expense will be subject to the SALT deduction limitation if the PTE-E is not made by the entity.
The statute indicates that the PTE-E is required to be calculated from distributive proceeds rather than more commonly used distributive income for the withholdings and composites. Distributive proceeds are defined as the net income, dividends, royalties, interest, rents, guaranteed payments and gains of a pass-through entity. The limited interpretation of “proceeds” does not provide for common deductions such as Section 179 deductions or self-employed health insurance that are included in distributive income calculation. Given that, it is possible that the PTE-E credit allowed on the composite return will be greater than the actual composite tax due. In the event of an overpayment, the refund is returned to the entity.
As part of the rule-making process, the Oregon Department of Revenue will accept comments on the proposed rules until November 29 when there will be a public hearing conducted online via a Microsoft Teams meeting either by video or telephone.
The State and Local Tax Team at Geffen Mesher is available to assist with the PTE-E all of your tax needs.
- Or Admin. R. 150-314-0525(2).
- Or Admin. R. 150-314-0520(1).
- Or Admin. R. 150-314-0515(1)(b).
- Senate Bill 727, Section 3(3)
- Senate Bill 727, Section 2(1)
- Or Admin. R. 150-314-0515(4)(c).