Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, individuals who itemize their federal tax deductions have been limited to a $10,000 deduction for state and local income taxes (“state taxes”). This has impacted taxpayers in high tax states like Oregon.
What is a Pass-Through Entity Elective Tax (PTE-E)
A pass-through entity elective tax (“PTE-E”) is meant to be a workaround for the federal $10,000 state tax limitation. It imposes an income tax directly on the PTE-E that is available as a refundable credit on the individual’s state tax return. The validity of a PTE-E tax has been the subject of scrutiny by the IRS, which left many states hesitant to adopt such a tax. In November 2020 the IRS issued Notice 2020-75, which announced the IRS’ intent to allow the PTE-E deduction in future regulations, validating the PTE-E strategy to avoid the federal $10,000 state tax limitation.
Oregon established their PTE-E tax in July of 2021 with the signing of Senate Bill 727. 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 election shall be made annually on or before the due date, including extensions, of the pass-through entity’s return.
If your pass-through entity elects to take the credit, you might be eligible for a credit on your personal Oregon income tax return. Qualifying members are eligible for a credit equal to 100 percent of the member’s distributive share of the PTE-E tax paid.
Unlike California’s PTE-E, all members of the pass-through entity must consent to PTE-E for the election to be valid. This includes Oregon non-resident shareholders and/or partners of the pass-through entity who might be subject to a lower effective tax rate on their Oregon non-resident return than the PTE-E would afford them.
If the pass-through entity is a member of a multi-tiered partnership structure, the pass-through entity may qualify to make the Oregon PTE-E election if it meets specific ownership requirements. Additional guidance from Oregon is needed to determine which multi-tiered partnerships may qualify and how the credit is distributed to partners of the pass-through entity.
The law is set to expire if the federal SALT deduction limitation expires or is repealed.
Paying the PTE-E
Currently, there is limited guidance available from the OR DOR. However, the state has released an FAQ indicating that pass-through entities wishing to make the PTE-E election and pay their 2022 estimated PTE-E tax payment, must register online first. Registration will open on June 6, 2022, with the Q1 and Q2 2022 PTE-E tax estimated tax payments due June 15, 2022. Registration enables pass-through entities to make PTE-E estimated tax payments but does not automatically elect the pass-through entity into the Oregon PTE-E as the election can only be made on a timely filed return.
Have Questions About Oregon Senate Bill 727 and the PTE-E Tax?
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