Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form; more particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states; corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
Currently, four states, Nevada, South Dakota, Washington, and Wyoming, do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax;” this is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Oregon has a corporation excise tax, which is effectively a corporate income tax, but no franchise or privilege tax generally applicable to businesses. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Oregon’s corporation excise tax applies to corporations carrying on or doing business in Oregon. (Somewhat confusingly, there is a separate tax known as the corporate income tax, which applies to corporations that do not carry on or do business in Oregon, but have income from an Oregon source; however, because this tax is not likely to be relevant to Oregon small businesses, it is not further covered here.) The excise tax is based on the greater of two values:
- the calculated tax on a corporation’s income; or
- a minimum tax based on Oregon sales.
The calculated tax on income is based on two marginal rates; the threshold for the higher rate is currently $250,001, but will greatly increase for the 2013 tax year. More specifically:
- for 2012, corporations with income of $250,000 or less pay a 6.6% tax, and corporations with income over $250,000 pay $16,500 plus 7.6% tax on the amount over $250,000;and
- for 2013, corporations with income of $10 million or less pay a 6.6% tax, and corporations with income over $10 million pay $666,000 plus 7.6% tax on the amount over $10 million.
The minimum tax based on Oregon sales breaks down as follows:
- under $500,000 in sales= $150 tax
- $500,000 to $999,999 in sales = $500 tax
- $1,000,000 to $1,999,999 in sales= $1,000 tax
- $2,000,000 to $2,999,999 in sales = $1,500 tax
- $3,000,000 to $4,999,999 in sales = $2,000 tax
- $5,000,000 to $6,999,999 in sales = $4,000 tax
- $7,000,000 to $9,999,999 in sales = $7,500 tax
- $10,000,000 to $24,999,999 in sales = $15,000 tax
- $25,000,000 to $49,999,999 in sales = $30,000 tax
- $50,000,000 to $74,999,999 in sales = $50,000 tax
- $75,000,000 to $99,999,999 in sales = $75,000 tax; and
- $100,000,000 and above in sales = $100,000 tax.
- all S corporations doing business in Oregon are required to pay a minimum excise tax of $150; and
- partnerships that are required to file Oregon tax returns, including LLCs classified as partnerships for federal tax purposes, are required to pay a minimum excise tax of $150 (this includes partnerships that have income from Oregon and have one or more partners who are Oregon residents; but, if a partnership is not required to file a federal tax return, it is also not required to file an Oregon tax return).
Corporation excise tax returns are due on the 15th day of the fourth month after the end of the corporation’s tax year (i.e., April 15th for corporations with tax years that follow that follow the calendar year). For purposes of comparison, note that Oregon taxes personal income at marginal rates ranging from 5.0% to 9.9%.
Some cities and counties in Oregon may assess an income tax on businesses separate from any state taxes. As a key example, Multnomah County, which includes the City of Portland, assesses the Multnomah County Business Income Tax (MCBIT). The MCBIT applies to every entity doing business in the county that has gross income of $50,000 or more; the rate is 1.45% of net business income, with a minimum tax of $100.
Let’s briefly look at additional details for five of the most common forms of Oregon business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Oregon corporations are subject to Oregon’s corporation excise tax, which is the greater of a calculated tax on income or a minimum tax based on sales.
S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status; unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each individual shareholder is subject to federal tax on his or her share of the corporation’s income; in other words, S corporations are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Oregon recognizes the federal S election, and Oregon S corporations are not required to pay corporate income tax to the state. However, S corporations are required to pay a minimum excise tax of $150. In addition, each individual S corporation shareholder will owe tax on his or her share of the company’s income.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Oregon. Instead, income from the business is distributed to the LLC members, and each individual member is subject to federal and state taxes on his or her share of the company’s income. (In cases where the LLC itself files an Oregon partnership tax return, it will owe minimum excise tax of $150.)
Note, however, that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would be subject to Oregon’s corporation excise tax at full corporation rates.
Partnerships. Income from partnerships is distributed to the individual partners, and each individual partner is subject to federal and state taxes on his or her share of the partnership’s income. (In cases where the LLC itself files an Oregon partnership tax return, it will owe minimum excise tax of $150.)
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Oregon. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Oregon, it may be subject to Oregon taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated; if you run such a business, you should consult with a tax professional.
For further guidance on Oregon’s corporation excise tax, check the Department of Revenue website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Federick Daily (Nolo).