Oregon Pass-Through Entity Elective Tax

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.

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The law is set to expire if the federal SALT deduction limitation expires or is repealed.

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.

Our team of SALT and Oregon Tax experts are available to you. Get in touch with our team to get your questions asked and answered.