Oregon Pass Through Entity Owners May Be Able To Avoid SALT Limitions In Whole Or In Part for 2022 & 2023.

Beginning with tax year 2018, the Congress limited the amount an individual may deduct for state and local income taxes to $10,000.  That limit had a big impact on the total tax paid for many of our clients. Last fall, the IRS announced, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through to the owners of the entity), the entity will not be subject to the $10,000 state and local taxes deductibility cap (the “SALT Cap”).

For tax years 2022 and 2023 only, Oregon has enacted SB 727 which gives pass-through entities an opportunity to elect to be liable and pay a “business alternative tax" to the state of Oregon.  This tax will be 9% on pass through income (for businesses with $250,000 or less in pass through income.  The rate increases to 9.9% for businesses with income above this amount).

The mechanics of this federal and state legislation appears to be as follows:

• The pass through entity pays the state tax on profits.
• The pass through entity deducts the full amount of this state tax on their return.
• The shareholder or partner repots the income net of that tax on their return
• The shareholder or partner reports a credit on their Oregon return for the taxes paid on their behalf.

The end result is that the state tax on this income is deducted in full.  The $10,000 Salt limit can then be used for property taxes and state income tax paid on other income.  Again, this legislation applies to only 2022 and 2023.  This is brand new legislation. There will be some complexities that we have not addressed here.