This bill limits eligibility for the pass-thru entity tax rates to business operating in one of the following seven economic sectors: agriculture, mining, manufacturing, wholesale trade, transportation and warehousing, information, or accommodation & food services. Increases the employment requirement for eligibility from one employee to ten employees.
Personal Choice and Responsibility
The pass-through tax rate objective is to provide a more favorable rate structure for business income earned by taxpayers who actively manage their own businesses and this bill changes the objective by eliminating start-up business with less than 10 employees in the 7 sectors. This effectively imposes a higher tax on any start-up business outside of the 7 – such as gyms, landscaping, yard services, housekeeping, hair dressers, dentistry, veterinary services, etc.
About 13,000 taxpayers used the preferential rates in 2015 at a total cost of roughly $70 million. Additional information suggests that use of the policy may grow substantially in the coming years with the cost eventually exceeding $300 million per biennium. This change would reduce the cost of the program to $196million this biennium, $277million in 2019-21 and $244million in 2021-23. What this is saying is small business less than 10 employees will be taxed more plus excluded business will be taxed.
HB 3601 from the 2013 Special Session gives taxpayers the option of having certain income from partnerships, S-corporations, and LLCs taxed at lower marginal rates. The policy objective is to provide a more favorable rate structure for business income earned by taxpayers who actively manage their own businesses. Requirements are that the taxpayer must “materially participate” in the business so that the income is considered “non-passive” income; the business has at least one full-time, non-investor employee; and at least 1,200 aggregate hours of work in Oregon are performed annually by qualifying employees.
This bill will impact rural Oregon start-ups taking money out of their economy.
For 74.0% of filers had their 2015 tax burden reduced by $5,000 or less. For 86.7%, it was reduced by $10,000 or less. The tax savings alone do not offset the cost of a new employee’s annual salary, but is part of the equation for small business owners looking to hire, reinvest, and grow their business.