SB 139 Increases Tax Liability for Some Businesses

This bill reduces marginal tax rates at which non-passive pass-through income is subject. Limits reduced rate pass-through income qualification to S corporations and partnerships with ordinary business income not in excess of $5 million and adds employment requirements.

Fiscal Responsibility
Amendment changes not just the rate, but adds a scale of qualifications to complicate the calculation. The rate extends the 7% rate to $500,000 taxable income and adjusts $500,000 to $1 million to 7.5% instead of 7.6%. Qualification requirement set employment ratio and hours worked. So for partnership or S corporate to use the 7% rate and the business income exceeds $250,000 but less than $500,000 must have 1 person who is not an owner, member or limited partner and had at least 1200 aggregate hours work, but it changes minimum 30 hours a week to not more than 1200 hours by any one employee for the reported year – so no full time employees. (A 30 hour week is 1560 hours) And to qualify for the 7.5% with business income between $500,000 and $1 million the business must employ 2 with 2400 aggregate hours worked, but not more than 1200 hours by any one employee – so still no full time employees. Higher categories also has the 1200 hour limit for any employee. In addition, distribution of income may not exceed 25%. In effect, it makes the whole benefit void.

Limited Government
During the 2013 special session, the Legislature made non-passive income received by personal income taxpayers from either a partnership or S-corporation (or an LLC filing as either) taxable at preferential rates. Taxpayers had the choice of opting into the program where non-passive income could be taxed at a rate as low as seven percent. The amount of eligible income was the net non-passive income from all qualifying entities. A qualifying entity is one that employed at least one person who is not an owner, member, or partner; had at minimum 1,200 annual hours of work performed in Oregon by qualifying employees; and only hours worked in a week in which an employee worked at least 30 hours count toward the total. In the Special Session of 2018, Oregon expanded its reduced rate tax option, with applicable existing requirements, to taxpayers with income from a sole proprietorship.

Free Markets
Very discouraging for those in business with pass-through income. Strips the economy of growth options in the free market. As if the Corporate Excise Tax wasn’t enough to discourage businesses to come to Oregon.