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On July 19, 2021, Governor Kate Brown signed Oregon Senate Bill 139, which restructures tax rates for pass-through entities. The bill severely limits the definition of qualified income eligible for the elective reduced personal income tax rate allowed for owners of certain pass-through entities while also increasing the amount of pass-through income eligible for the lowest tax rate. The bill also adds a requirement for Oregon nonowner employees.
Since 2015, individual taxpayers can have pass-through entity income received from partnerships, S corporations, sole proprietorships, and LLCs taxed at lower marginal rates than Oregon's regular individual income tax rates.
The policy objective of the reduced pass-through entity tax rates is to provide a more favorable rate structure for business income earned by taxpayers who actively manage their own businesses.
The primary requirement for a taxpayer to receive the lower rates is that they “materially participate” in the business.
SB 139 reduces the tax rate from 7.2% to 7% for pass-through income exceeding $250,000, but not exceeding $500,000. The bill also provides a slight rate decrease from 7.6% to 7.5% for income between $500,000 and $1 million.
The bill also excludes from qualified income all income that passes through from a partnership or S corporation that has ordinary business income in excess of $5 million.
Oregon’s smallest businesses with less than $250,000 in ordinary business income will see no change, and the rate will remain 7%.
Additionally, a new requirement will apply to S corporations and partnerships with ordinary business income exceeding $250,000. Businesses subject to this requirement will need to meet or exceed a new “employee to owner ratio,” adjusted based on income, and/or reinvest at least 75% of business profits back into the business, making it harder to qualify for the program.
It is important to note that this legislation is retroactive to January 1, 2021.
|Ordinary Taxable Income||New Tax Rate|
|$0 – $500,000||7%|
|$500,000 – $1 million||7.5%|
|$1 – $2.5 million||8%|
|$2.5 – $5 million||9%|
|> $5 million||9.9%|
SB 139 will impact the owners of many pass-through businesses that operate as a partnership, S corporation, or LLC in Oregon.
The greatest impact will be on those businesses with income in excess of $5 million, as these pass-through entity business owners will no longer benefit from the favorable reduced tax rate structure. This prohibitive impact on businesses with income in excess of $5 million is applicable retroactive to January 1, 2021.
Business owners that have previously taken advantage of this election will need to update their quarterly estimated tax payments based on the new rate schedule.
Stay tuned for more information; Delap will continue to monitor this issue as more guidance is issued.