The 2013 Small Business Tax Relief explained:
“It was dubbed the grand bargain because of its disparate elements…Kitzhaber can boast that Oregon stands as a national model of bipartisan cooperation…The bill cut rates for partnerships, limited liability companies, S corporations, and some export businesses.”
The Oregonian Oct 2, 2013
It was October 2, 2013 when Democrats and Republicans came together and voted on a package of bills that included reducing tax rates for Oregon small business. Before the tax relief small family owned businesses were paying a higher tax rate than corporate businesses. The Grand Bargain Small Business Tax Relief package aimed to reduce tax rates for certain qualifying family owned, S-Corporations, Sole Proprietorships and LLCs.
The results were impressive.
A small business tax break passed by Oregon’s Legislature in 2013 led to an explosion in job growth for small businesses in the State.
- Tax break was passed to protect small business from Oregon’s high tax rates (note: most small businesses file as “S” Corporations, and pay the State’s personal income tax rates on their earnings). Oregon has the second highest top tax rate on individuals in the nation.
- Bill provided an estimated benefit of $150 million (less than 1 percent of the General Fund budget) by applying a lower rate on the first $10 million
- As supporters predicted, job creation soared after passage of the small business tax break
- In the 3 years after passage of the break, small businesses in Oregon (1-49 employees) hired almost 68,000 new workers according to the federal Bureau of Labor Statistics.
- These new workers contributed to tremendous growth in the State’s economy and personal income tax collections. Total wages paid by small businesses grew by over $1.2 billion in just 3 years. Studies show that for each additional $1 made available in the economy, another $0.66 of local economic activity takes place as this new dollar circulates. The total Oregon economic impact of the $150 million tax break over 3 years would therefore be almost $2 billion.
- The tax break was a net “win” for State coffers, giving the Legislature more money to spend on schools, public safety and other priorities.
The tax provisions of the grand bargain include:
Reduced Oregon Tax Rate on Nonpassive Flow-Through Income from Partnerships and S Corporations. For tax years beginning on or after January 1, 2015, taxpayers subject to the Oregon personal income tax may elect to have nonpassive income attributable to any partnership or S corporation (after reduction for nonpassive losses) taxed at the following rates:
The term “partnership” includes a limited liability company (LLC) or other entity taxed as a partnership. However, the new reduced rates will not apply to a single-member LLC that is disregarded as an entity separate from its owner. As a result, Schedule K-1 income reported on Schedule E generally will receive more favorable tax treatment than either Form W-2 wage income or income from a sole proprietorship (including from a single-member LLC) reported on Schedule C.
“Nonpassive income” is as defined in the Internal Revenue Code and does not include wages, interest, dividends or capital gains. In calculating the amount of income not subject to the special rates, taxpayers must use the subtractions, deductions and additions otherwise allowed. On the other hand, in calculating the amount of income subject to the special rates, depreciation adjustments directly related to the partnership or S corporation are the only additions or subtractions allowed.
A taxpayer can elect to use the alternative rates only if: (1) the taxpayer materially participates in the day-to-day operations of the trade or business; (2) the partnership or S corporation employs at least one person who is not an owner, member or limited partner of the partnership or S corporation; and (3) those non-owner employees perform at least 1,200 aggregate hours of work in Oregon by the close of the tax year, taking into account for this purpose only hours worked by an employee in weeks in which the employee works at least 30 hours.
A nonresident may apply the reduced rates only to “income earned in Oregon.” A part-year resident must calculate the tax due using the reduced rates by first applying those rates to the taxpayer’s qualifying nonpassive income, and then multiplying that amount by the ratio of the taxpayer’s nonpassive income in Oregon divided by nonpassive income from all sources. A nonresident joining in the filing of a composite return is not eligible for the reduced rates.
The bill directs the Legislative Revenue Officer to calculate projected and actual ratios of revenue loss to total state income. To the extent the actual ratios deviate from the projected ratios by specified thresholds, the special tax rates will be adjusted for tax years beginning after 2018 and again after 2022.
Change in the Oregon Corporation Excise Tax Brackets. For tax years beginning on or after January 1, 2013, the Oregon corporation excise tax brackets have been changed so that the 7.6% top marginal rates apply to taxable income in excess of $1 million, rather than taxable income in excess of $10 million. This change also applies to the Oregon corporation income tax, which adopts by reference the Oregon corporation excise tax brackets and rates.