In a special election at the close of its 2013 session, the Oregon legislature granted a small business tax break for individuals who receive flow-through income from an active trade or business. This favorable treatment goes into effect for the 2015 tax year as follows:
What is Flow-Through Income From an Active Trade or Business?
In simple terms, it is active trade or business income received from:
- An S corporation that reports its income on an IRS Form 1120-S
- A multimember limited liability corporation (LLC) that reports its income on an IRS Form 1065 (not a single member LLC that directly reports activity on a Schedule of the IRS Form 1040).
The owners of these type of entities receive a Schedule K-1 to record their share of the income associated with the businesses. These business entities do not pay federal taxes, but rather this income flows-through and is reported on the owners IRS Form 1040.
A farming business that is not organized as S Corporation or multimember LLC reports activity on Schedule F of the IRS Form 1040.
Does This Treatment Apply to Me?
If your Oregon-based farm has already been organized as an S Corporation or Multimember LLC, then you’ll enjoy lower Oregon tax rates in 2015. If not, you should consider whether the incremental effort to restructure your business makes sense. There are costs associated with setting up a separate business entity as well as ongoing administrative costs to manage the tax filings and other business affairs (e.g., publication of corporate minutes).
Another item to consider is that Oregon’s tax rates are graduated. So even if your Company is above the $5,000,000 income mark you can be paying lower rates on income from $1 – $2,499,999. This can mean significant tax savings even if your Company is in the highest Oregon tax brackets.
Your tax advisor can provide estimates of savings as well as ballpark figures for your one-time and recurring costs. As the benefits start this tax year, it’s an auspicious time to consider this opportunity.