Taxes in Oregon for Small & Medium Business: The Facts
There are many incentives for entrepreneurs on the West Coast to choose Oregon as a home for their small and medium businesses. Oregon’s southern neighbor, California, has a high cost of living, as do many large cities in the state’s northern neighbor, Washington. Many parts of Oregon, particularly the Portland area, have a growing, thriving, well-educated population, with many prestigious universities that produce new classes of qualified workers every year.
Where quality of life is concerned, Oregon may not offer the abundant sunshine and year-round warmth of Southern California, but its residents enjoy less crowded conditions, less crime and lighter traffic, and still benefit from mild winters and temperate summers. .
- Oregon may not be a well-known hub for businesses like its neighbors Washington State and California, but the state offers some favorable tax breaks to small businesses.
- Depending on the organizational form a business takes, tax treatment can vary.
- The most common form of corporate taxation in Oregon is the excise tax, which starts at a rate of 6.6%.1
Tax benefits for small business
While not a comprehensive tax treaty like some Sun Belt states like Texas and Florida, Oregon offers many tax benefits to small business owners that paint it in a favorable light, especially compared to California. Business owners in California are often heavily taxed on business income and personal income from the business. In Oregon, by contrast, business owners pay one or the other. Additionally, personal income taxes in Oregon are lower than in California, especially for high earners.
Until 2020 (when its corporate activity tax went into effect), Oregon had only one type of tax on businesses, and for the most part, it was only imposed on corporations and limited liability companies (LLCs) that are treated as corporations.2 Most small businesses are set up as S corporations. , LLCs are not treated as corporations, partnerships, and sole proprietorships, which means their business taxes, if applicable, are minimal in Oregon.
Oregon corporation tax
If a small business is set up as a C corporation or an LLC that chooses to be treated as a corporation, Oregon imposes something called a corporation excise tax, which is basically the state’s terminology for a corporate tax.3 Although most small businesses are not C corporations and some LLCs are corporations. As small businesses choose to act, understanding this tax is important as small businesses grow into traditional corporations over time.
The corporate excise tax applies to corporations in Oregon and is assessed on in-state business income. As of 2020, this tax has two marginal rates: 6.6% on the first $1 million of income and 7.6% on all income above $1 million.1 For example, an Oregon corporation with $11 million in net income owes a total of $826,000 in taxes: $66,000 on the first $1 million and $760,000 on the remaining $10 million.
Oregon corporations that do not claim net income or net losses must still pay a minimum tax based on gross sales. This minimum tax ranges from $150 for sales under $500,000 to $100,000 for sales over $100 million.4
Businesses incorporated as corporations are mostly shielded from Oregon’s corporation excise tax. However, certain non-incorporated business types must pay a minimum excise tax of $150. This minimum tax applies to all LLCs classified as S corporations and partnerships.4
C corporations pay the Oregon corporation excise tax described above, which is calculated in one of two ways: based on net income or net sales. The tax payable is the higher of the two calculated amounts.1 Corporations are separate entities from their owners for tax purposes and therefore income does not flow through them. However, certain income these owners receive from participating in the business may be taxed at the state level.5 Capital gains and dividends are taxed at the taxpayer’s marginal income tax rate, which can be as high as 9.9%.6
S corporations operate like C corporations in that they form separate entities that provide legal and financial protection for business owners and their personal assets. The difference between the two is that S status files with the Internal Revenue Service (IRS), which allows proceeds from sales to flow from the corporation to its owners.
Because the owner then pays personal income tax on this money, the federal government does not impose a corporate tax on the business, resulting in double taxation.7 Most states follow this philosophy. California is not one of them, but Oregon is, except for the $150 excise tax that S corporations must pay.89
For example, an Oregon S corporation with $20 million in net income still pays only $150 in taxes.8 This income then passes to the owners, who pay individual state income taxes at marginal rates that run from 4.75% to 9.9% based on gross income.10
LLCs are pass-through entities that can be classified in different ways. This classification determines the tax treatment of LLCs in Oregon. The default LLC classification is as a partnership for businesses owned by multiple individuals and as a disregarded entity for businesses owned by individuals. For an LLC classified as a partnership, taxes are the same as for an S corporation.
A minimum excise tax of $150 is owed on the business, while business owners pay personal income tax on the income they pass through.11 For LLCs classified as disregarded entities, no business income tax applies; Only personal tax is payable on pass-through income. In some rare cases, an LLC chooses to act as a corporation. However, the same tax rules for Oregon C corporations apply to LLCs.
Partnership and Sole Proprietorship
In most partnerships and sole proprietorships, the business owner receives their share of the income directly from the business and does not pass through the company. In these cases, Oregon imposes no income tax on the business, even a minimum excise tax of $150.12 The business owner pays personal state income tax at ordinary rates based on which of Oregon’s four tax brackets they fall under.10 The only exception is for LLCs that file partnership tax returns. In this situation, the business is responsible for paying a minimum Oregon excise tax of $150.11