In July 2021, Oregon established an elective Pass-Through Entity Tax (PTE-E), a business alternative income tax in response to the $10,000 cap on the federal State and Local Tax (SALT) deduction added in the 2017 federal Tax Cuts and Jobs Act.
For tax years beginning on or after January 1, 2022 entities taxed as S corporations and partnerships may elect annually to be subject to the PTE-E tax at a rate of 9 percent tax on the first $250,000 of distributive proceeds and 9.9 percent tax on any amount exceeding $250,000. The law will expire if the federal SALT deduction limitation expires or is repealed.
Qualifying members of an electing PTE are eligible for a credit equal to 100 percent of the member’s distributive share of the PTE-E tax paid.
The entity level election must be made by all owners. Each owner’s tax situation is likely to differ, but all owners must be part of this election. The election is an annual election.
As a quick simplified example of how this would work: ABC LLC has two 50% owners and each owner’s share of company income is $100,000 (their K-1 income). If ABC LLC had made the PTE Election and paid in $10,000 to Oregon for each owner, then the owner’s federal taxable income would be $90,000 (the $100,000 less the $10,000 in state taxes deducted). For Oregon, each owner would have $100,000 of income from the LLC (the amount prior to the state tax deduction), but they would each get a $10,000 credit against their computed Oregon income tax. The owners would effectively still get a full federal deduction for the state taxes paid (not subject to the $10,000 cap). This would save on both federal income taxes as well as any associated self-employment taxes.
There are currently no administrative rules and the Oregon Department of Revenue has provided FAQs, which are likely to be updated in the future as further clarification is provided. If the prospect of making this election is something you are interested in evaluating, you need to read the Oregon FAQs as there is a lot of information that will help address questions you may have.
Here is a link to the Oregon Department of Revenue website regarding the PTE-E >>Oregon PTE-E
The Oregon website to register for the PTE-E is scheduled to open on June 6, 2022, and the first estimated payments are due June 15th, 2022. After that initial payment, payment dates will match up with normal due dates of individual estimated tax payments (April 15th, June 15th, September 15th, and January 15th). If you are making the election for 2022, you would want to register and start making PTE-E payments this June, the actual election is made on the company tax return when filed, including extensions.
The taxes paid at the entity level are meant to cover the entity income, and estimated tax payments may still be necessary if the owner has other types of taxable income that aren’t subject to adequate withholdings (for example investment income).
Please consult your McDonald Jacobs tax advisor for a more in-depth discussion/analysis.