Oregon has had a special reduced tax rate (generally up to a 2% reduction in tax rate) for owners of pass-through entities (PTE) and Sch. C sole-proprietorship (see qualification in separate section below). For 2021, the rules have changed and it’s a lot harder to qualify for the reduced tax rate. Because of these new rules, the business needs to analyze qualification at the entity level and provide information to the owners. The owner completes Oregon Form PTE to claim the reduced tax rate in their Oregon personal income tax return.
To qualify the business entity needs to be:
- A partnership/LLC or S-Corporation with non-passive income;
- The owner need to materially participate in the business;
- Ordinary business income doesn’t exceed $5 million (excludes things like charitable contributions, investment income, most types of gains/losses on sales and other items);
- Employs one or more employees in Oregon who meet the employee requirements; and
- If ordinary income is more than $250,000, they must have more than one qualifying employee based on the table below.
- For an employee to be a qualifying employee, they must have worked at least 1,200 qualifying hours during the tax year, including work hours only for weeks in which the employee worked at least 30 hours. An employee that is a spouse or other family member that isn’t an owner/member/partner can be a qualified employee. Independent contractors are not Leased employees can be qualifying employees
Partnership and S corporation employee requirements:
|Ordinary business income is at least||But not more than||Employees required||Aggregate hours worked by employees|
|$500,001||$1,000,000||Two per owner||2,400|
|$1,000,001||$2,500,000||Four per owner||4,800|
|$2,500,001||$5,000,000||Ten per owner||12,000|
Important note: If your ordinary income is over $250,000 and you fail the qualifying employee test, you can still qualify if your income distributions for the year don’t exceed 25% of the ordinary business income.
- Has qualifying business income from the sole proprietorship;
- Materially participate in the business; and
- Employ one or more qualifying employees in Oregon (see employee qualifications in the entity section above).
Note: For more details see the instructions to the Oregon PTE form on the Oregon Department of Revenue website. Link>> 2021 Instructions