Income Taxes on Business Income in Oregon

April 13, 2006

	Visited: 100
	Not rated
	Rate:

In Oregon, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

Warning

Certain local governments in Oregon assess a business income tax. The business income tax applies to any individual, sole proprietorship, partnership, joint venture, association, club, estate, trust, corporation, or any other non-governmental entity capable of doing business. Wages earned by an employee are not subject to the business income tax. Make sure you check with your local government to see if you are subject to these local taxes.

Corporations. Domestic corporations (corporations organized in Oregon) and foreign corporations (corporations organized in a state other than Oregon) are subject to an Oregon income tax. Technically, there are two different taxes: the corporate excise tax applies to domestic corporations and those authorized to do business in the state, and corporation income tax is levied on other corporations with income attributable to Oregon sources. However, both taxes impose the same rate of tax: 6.6 percent of taxable income with a minimum of $10. Thus all corporations, including financial corporations, are subject to the same rate of tax whether it is the corporation excise tax or the corporation income tax.

If your only activities in Oregon consist of sales and you don't own or rent any property in the state you may be eligible to pay an alternative tax. In order to be eligible, your annual gross sales made during the tax year in Oregon must not exceed $100,000. The alternative tax is 0.25 percent of the dollar volume of your sales. If your return on sales is less than 5 percent, the tax is 0.125 percent of your dollar volume.

S corporations. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Oregon, the law extends this favorable tax treatment to state corporate income tax liability, and S corporations will not be subject to the corporate income tax.

Partnerships. If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Oregon taxable adjusted gross income their distributive share of partnership income.

Limited liability companies (LLCs). Oregon law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Oregon are classified as either partnerships or corporations for Oregon tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership on the federal level, then it will not be taxed on its net income. Instead, members must include in their Oregon taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Oregon tax purposes.