Oregon Alternative Pass-Through Entity-Level Business Income Tax
Oregon's alternative pass-through entity-level business income tax under Senate Bill 727, offering relief from the SALT limitation imposed by the TCJA. Learn about eligibility, benefits, tax rates, and a detailed example scenario.
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Presentation Transcript
STATE TAX UPDATE: NEW OREGON PASS-THROUGH ENTITY-LEVEL BUSINESS ALTERNATIVE INCOME TAX
OREGON ALTERNATIVE PTE INCOME TAX AGENDA Background Benefits Who s Eligible? Example Considerations Election
OREGON ALTERNATIVE PTE INCOME TAX BACKGROUND SENATE BILL 727 (SB 727) SB 727 was introduced as Oregon s response to the enactment of The Tax Cuts and Jobs Act (TCJA) and the IRS Notice 2020-75 TCJA Imposed a limit on the amount of state and local taxes that an individual may deduct from federal taxable income each year. $10,000 Limitation IRS Notice 2020-75 Clarified that state and local taxes paid directly by a pass-through entity in accordance with qualifying state or local laws will not be subject to the SALT limitation.
OREGON ALTERNATIVE PTE INCOME TAX BENEFITS SENATE BILL 727 (SB 727) SB 727 allows certain PTEs an election to pay an Alternative Business Income Tax at the entity level. Since the SALT limitation does not apply to taxes paid directly by a pass- through entity, shifting the tax liability from the individual to the entity level may provide relief from the TCJA SALT limitation. Additionally, the individual owner will receive a credit against their Oregon tax liability for their share of the tax paid by the entity.
OREGON ALTERNATIVE PTE INCOME TAX WHO S ELIGIBLE Eligible PTEs include partnerships, S-Corps, and LLCs electing to be treated as a partnership or S-Corp. Sole proprietorships and single-member LLCs treated as a sole proprietorship are not eligible. All PTE members/owners must be individuals or are entities that are owned entirely by individuals subject to Oregon personal income tax.
OREGON ALTERNATIVE PTE INCOME TAX TAX RATES Nonpassive Income Tax Rates Taxable Income Up to $500,000 $500,000 - $1 million $1 million - $2.5 million $2.5 million - $5 million Over $5 million Pass Through Entity Tax Rates Distributive Proceeds Up to $250,000 Over $250,000 Tax Rates 7% 7.5% 8% 9% 9.9% Tax Rates 9% 9.9%
EXAMPLE ONE Joe is a 100% owner in a pass-through entity & meets the criteria to use the PTE owner rates. Company has income of $500,000 for the year, all of which is nonpassive qualified income. **NOTE: Example does not consider personal exemptions, deductions, & other considerations**
EXAMPLE TWO Joe is a 100% owner in a pass-through entity & meets the criteria to use the PTE owner rates. Company has income of $3 million for the year, all of which is nonpassive qualified income. **NOTE: Example does not consider personal exemptions, deductions, & other considerations**
OREGON ALTERNATIVE PTE INCOME TAX CONSIDERATIONS The Business Alternative Tax and resulting credits are available for the 2022 and 2023 tax years. If the federal SALT limitation is repealed before the end of 2023, the Business Alternative Tax will automatically be repealed. The election may not benefit all members. Under certain circumstances, it could increase a member's tax. Items to consider include: Differences in the individual members own tax situations. Adjustments to compute the entity-level tax & corresponding tax credit. Graduated tax rates pending income levels.
OREGON ALTERNATIVE PTE INCOME TAX ELECTION Election must be made annually. Election may be made if consent is given by all members or may be made by any officer, manager, or member who is authorized under law or organizational documents. Election is made annually on or before the due date (including extensions) of the pass-through entity s return. The election may not be made retroactively.
