The Pass-Through Entity Elective Tax in Oregon
May 16, 2022
As we reported last August, the Oregon legislature recently adopted a tax reform measure in response to the passage of the 2017 Tax Cuts & Jobs Act (TCJA), which created a $10,000 limit on the state and local tax deduction. Senate Bill 727, signed into law on July 19, 2021, created a pass-through entity process to provide a method for qualifying Oregon taxpayers to circumnavigate this limitation.
Technically referred to as the “Business Alternative Income Tax,” this process is more commonly referred to as a Pass-Through Entity-Elective Tax (PTE-E). Effective for tax years 2022 and 2023, owners of eligible entities can elect to pay their Oregon tax liability at the entity level as a PTE-E, rather than as personal income tax. An eligible entity is either an S-corporation or a partnership that is owned by individuals, or entities that are pass-through entities owned entirely by individuals. Individuals include certain entities subject to Oregon personal income tax, for example, a grantor trust. It originally seemed as though single-member LLCs and sole proprietorships could use this process, but it was clarified during the 2022 Oregon legislative session that these entities do not qualify for the PTE-E.
In order to participate in the PTE-E, all members of the eligible entity must agree, and the annual election must be made on a timely filed entity tax return. The election is not considered officially made until the entity files its tax return (due 3/15/23), so even if estimated payments are made during the year, the election is not final.
The tax due for the election is based on eligible distributive income which includes operating income. The first $250,000 of net income will be taxed at the PTE-E tax rate is 9%. Any amount above $250,000 will be taxed at 9.9%. The owner, member, or partner electing into this tax regime will be allowed a credit equal to their percentage of tax paid by the entity. The PTE-E rules are effectively made to work with the Oregon qualified business income reduced tax rates (QBIRTR), which allows for lower individual rates beginning at 7% for individuals that receive income from qualified businesses. Thus, when the entity pays the PTE-E tax at 9 or 9.9%, individuals paying a 7% tax will get a refund for the difference between 7% and the 9 or 9.9% paid by the entity.
The next deadline for Oregon taxpayers is the upcoming June 15 estimated tax payment deadline. The estimated tax payment does not constitute the “election”, which is made with the originally filed return. In order to make the quarterly payments, either use Oregon Voucher OR-21-V or make the online payment through the entity’s Revenue Online account. According to the Department of Revenue website, the Revenue Online system will be ready to accept PTE-E activity after June 6.
Under Senate Bill 1524, timely estimated tax payments are required to avoid underpayment penalties for this election. The first payment will be for 50% of the tax due. Subsequent estimated payments will be due September 15, 2022 (additional 25%) and January 15, 2023 (final 25%).
For more information on this to determine if your partnership or S Corporation should make this election or other state and local tax matters, please contact our SALT team at SALT@GMCO.com.