With the Jan. 26, 2010, passage of Measure 67 in Oregon, taxes on corporations with sales in the state will increase retroactively to 2009. C corporations will pay a higher minimum tax and higher corporate income tax on income in excess of $250,000. Other business entities will pay an increased minimum tax regardless of profits.
This advisory provides a brief analysis of Measure 67's implications and describes a strategy for tax reduction for businesses operating as C corporations.
New corporate minimum tax
C corporations filing Oregon income tax returns on Oregon source income were targeted for tax increases under Measure 67. Before passage of Measure 67, businesses operating as C corporations paid a minimum annual tax of $10 and a 6.6 percent income tax on profits. Measure 67 has increased the minimum annual tax to $150 regardless of profits.
Although all C corporations will experience this 15-fold increase in the minimum tax, those corporations with Oregon gross revenues in excess of $500,000 will be impacted most. For those corporations, Measure 67 increases the minimum tax rate of 0.1 percent. For example, a corporation with $500,000 of gross revenues will pay a minimum tax of $500, while a corporation with $10 million in gross revenues will pay $10,000 regardless of profits. The “minimum tax” can be as high as $100,000.
New permanent corporate income tax rates
An additional permanent tax increase applies to corporate profits. The current 6.6 percent income tax rate will apply to profits up to $250,000 then increase to 7.9 percent for net income in excess of $250,000 for tax years beginning on or after Jan. 1, 2009, and before Jan. 1, 2011. The top rate falls slightly to 7.6 percent for tax years beginning on or after Jan. 1, 2011, and before Jan. 1, 2013. For tax years beginning on or after Jan. 1, 2013, the 7.6 percent rate applies to corporate income in excess of $10 million.
Retroactive rates to 2009 business activity
Note that both of these increases apply to last year’s business activity! Businesses with high gross revenues and thin profit margins (e.g., grocery stores, nurseries and fuel companies), will experience a substantial increase in Oregon tax, since the tax applies on sales regardless of profit.
Tax reduction strategy
How can the owners of a C corporation who continue to conduct business in Oregon protect their business from these substantial tax increases? Many C corporations will qualify for S corporation tax status. An election can be filed with the Internal Revenue Service to convert to S status that will cap the Measure 67 minimum tax increase at $150 regardless of gross revenues. Corporations with calendar tax years beginning Jan. 1 can make the election retroactively to the first of this year by filing the form by March 15, 2010. While this won’t avoid the retroactive increase for 2009, it will begin to reduce tax liability immediately in 2010.
A C corporation may qualify to elect S status if it fits within the following requirements:
- The corporation is a domestic corporation with not more than 100 shareholders (members of a family can qualify as “one” shareholder)
- Have “qualified shareholders” (individuals but not nonresident aliens, estates for a short duration and certain trusts)
- Maintain one class of stock (voting and nonvoting stock is permitted)
Taxpayers who conduct business as a C corporation should consult with their tax advisors to consider additional factors, including but not limited to the following:
- Elimination of double tax (at both corporate and shareholder level)
- Existence of current unused loss carry backs or carry forwards
- Existence of built in gain (which may be lower in today’s economy)
- Individual taxpayer income tax rates (since individuals pay tax on S corporate earnings)
- Business owners’ succession planning and exit strategies
With the passage of Measure 67, S elections may be particularly attractive because an S corporation's minimum tax rate is capped at $150, and corporate income escapes increased corporate income tax rates.