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Strategies For Coping With Ballot Measure 67
With the passage of Ballot Measure 67 last month, we must learn to live with its consequences.
Most people with a TV heard that Ballot Measure 67 raised the minimum tax on business entities to $150. Previously, C corporations (corporations other than those electing special subchapter S status) had a $10 minimum tax. S corporations, multiple-member LLCs and partnerships did not have to pay an annual minimum tax since the net income generated by these entities flowed through for state and federal tax purposes to the owners’ tax returns regardless of the amount distributed to the owners, and there was normally no state tax at the entity level.
Now, under Ballot Measure 67, all entities doing business in Oregon, other than certain entities which are disregarded entities for tax purposes (e.g., single member LLCs and tax exempt entities) must pay at least a $150 minimum tax.
Minimum Tax for C Corporations
For a C corporation with sales in Oregon, the news gets worse. For 2009 and thereafter, these entities must pay the greater of (1) a tax on gross receipts (the C corporation minimum tax), or (2) an increased excise tax based on taxable income. The C corporation minimum tax ranges from 0.03% to 0.1% and is due regardless of an entity’s profits. Consequently, businesses with high gross revenues and thin profit margins will experience significant increases in taxes. Corporations not doing business in Oregon and tax exempt entities without any unrelated business income are exempt from the minimum tax.
Excise Tax Initial and Permanent Increase
If a C corporation’s income that is taxable in Oregon exceeds $250,000, the rate of excise tax is increased on the excess by 1.3 percentage points for 2009 and 2010, up from 6.6% to 7.9%. This initial rate on the excess is then decreased for 2011 and 2012 by 0.3 percentage points to 7.6%. In 2013 and thereafter, the prior 6.6% rate applies to taxable income up to $10 million and the higher rate of 7.6% applies to taxable income above that level.
S Election Strategy
Many C corporations qualify to make an election to be taxed as a S corporation. If such action is taken, the minimum tax would drop to $150 and the entire excise tax increase could disappear since the S corporation would generally pass its income through to the owners’ tax returns. (The owners may be subject to the increases in the top tax rates made effective by the passage of Ballot Measure 66.)
For a C corporation to qualify to make an S election it must have 100 or fewer shareholders (according to specific counting rules), the shareholders must be “qualified” shareholders (e.g., not non-resident aliens), and there can only be one class of stock. It is too late to make an S election for 2009. If this maneuver is to be effective for 2010, the election must be filed by March 15, 2010.
Before electing S status to avoid or reduce the state tax impact of Ballot Measure 67, a corporation should consider the federal income tax issues that would flow from such an election. The election is not always available or wise.
If you believe your corporation is a candidate for making an S election, we are prepared to assist you. Be sure to contact Dunn Carney and your CPA to discuss your situation before the March 15 deadline. Bob Winger, head of the Tax Team can be reached at (503) 306-5332 or
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