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Jamie C. Yesnowitz
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Priya D. Nair
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On April 10, 2018, Oregon Gov. Kate Brown signed Senate Bill (S.B.) 1529 updating Oregon’s conformity to the Internal Revenue Code (IRC) to the version in effect as of Dec. 31, 2017.1
Notably, S.B. 1529 selectively adopts provisions relating to the IRC sections which were enacted or amended as part of federal tax reform, including an addition to income under IRC Sec. 965 (related to the one-time repatriation tax) for tax years beginning on or after Jan. 1, 2017.
On April 13, 2018, Brown signed S.B. 1528, which decouples from the newly enacted federal 20 percent pass-through income tax deduction included under IRC Sec. 199A for tax years beginning on or after Jan. 1, 2018.2
Federal tax reform and state conformity to the IRC
The adoption of H.R. 1, commonly referred to as the Tax Cuts and Jobs Act (TCJA), on Dec. 22, 2017, provided a significant overhaul of the federal income tax system. The TCJA not only created entirely new sections of the IRC, but also made substantial changes to existing law. In addition, while most changes resulting from the TCJA are prospective in nature, certain aspects of the TCJA, including IRC Section 965, became applicable for the 2017 tax year.
The TCJA moves the U.S. toward a partial territorial system by implementing, under IRC Section 965, a one-time “transition tax” on previously unrepatriated foreign earnings that is reportable for calendar-year taxpayers on the 2017 tax return. Mechanically, there are two steps in the transition tax calculation under IRC Section 965. First, under IRC Section 965 (a), subpart F income is increased by unrepatriated earnings from foreign subsidiaries (i.e., a gross income inclusion).3
Second, under IRC Section 965(c), there is a “participation exemption,” which provides a deduction that effectively reduces the tax rate on unrepatriated earnings to 15.5 percent on cash and cash equivalents, and 8 percent on non-cash assets.4
On March 13, 2018, the IRS released much-anticipated guidance regarding reporting and payment requirements for Section 965 inclusions on 2017 income tax returns.5
Accordingly, C corporation taxpayers are required to report both amounts for federal income tax purposes on new Form 965, Transition Tax Statement, rather than including them on Form 1120 in the computation of adjusted gross income.
Also, the TCJA generally provides a 20% deduction from taxable income for federal income tax purposes for certain pass-through entities, including S corporations, partnerships, sole proprietors, and certain beneficiaries of trusts.6
The deduction is not available to businesses that provide certain services (i.e., legal, medical, accounting) except where the service providers earn less than a specified threshold amount of income. For most pass-through owners, the deduction is the lesser of: (i) combined qualified business income, defined as the greater of 50% of W-2 wages allocable to the owner or 25% of W-2 wages of the business plus 2.5% unadjusted tax basis in business property allocable to the owner; or (ii) 20% of the excess of the taxpayer's taxable income over the sum of any net capital gain.
Oregon Senate Bill 1529
Historically, Oregon has conformed to the IRC on a static basis and previously conformed to the IRC in effect as of Dec. 31, 2016.7
S.B. 1529 updates the state’s IRC conformity date to Dec. 31, 2017, for tax years beginning on or after Jan. 1, 2018.8
For tax years beginning on or after Jan. 1, 2017, S.B. 1529 specifically decouples from IRC Section 965 by requiring that corporations add back the amount of the federal dividends received deduction related to repatriation (a repatriation addition) in computing taxable income.9
Notably, the IRS allows tax on the repatriated income to be paid over eight years; however, Oregon is not tied to this extension of time for paying the tax. The Oregon tax on the repatriated income is due by the due date of the return, excluding extensions.10
S.B. 1529 also allows an Oregon dividend received deduction against the Oregon repatriation addition (a repatriation subtraction). If the repatriation addition is derived from a 20% owned corporation as described in Ore. Rev. Stat. Sec. 317.267(2)(b), the repatriation subtraction is computed by multiplying the repatriation addition by 80%.11
Otherwise, the repatriation subtraction is computed by multiplying the repatriation addition by 70%.12
Further, S.B. 1529 provides a 2017 tax credit for Oregon tax attributable to income reported under IRC Section 965. The 2017 Oregon tax credit is equal to the lesser of these two:
- The Oregon tax attributable to the IRC Section 965 inclusion for tax year 2017
- The total amount of Oregon tax, if any, attributable and imposed on the listed tax jurisdictions under Ore. Rev. Stat. Sec. 317.716 for tax years 2014, 2015 and 2016.13
The credit may not decrease taxable income below zero and may be carried forward for five tax years.14
The Oregon Department of Revenue is currently drafting an administrative rule that will provide guidance as to how the repatriation credit is calculated, with a public comment period expected in May 2018.15
Finally, the legislation eliminates the state’s tax haven law beginning in tax year 2017.16
Under the state’s prior tax haven law, Oregon taxpayers were required to include income and losses of unitary group members located in listed tax havens.17
Oregon Senate Bill 1528
Unlike many states, Oregon uses federal taxable income, rather than federal adjusted gross income, as a starting point in determining state taxable income.18
As a result, without specific legislation decoupling from the TCJA, Oregon taxpayers receiving income from S corporations, partnerships, and other pass-through entities would also be able to claim the TCJA’s 20% federal deduction for pass-through income under IRC Sec. 199A against their Oregon taxes.
Applicable to tax years beginning on or after Jan. 1, 2018, S.B. 1528 requires an addition modification for “the amount allowable as a deduction under section 199A (a) of the Internal Revenue Code for the tax year.”19
Further, S.B. 1528 provides that individual and corporate income taxpayers that make certified contributions to the Opportunity Grant Fund, which is a need-based grant program for college students, are eligible for a tax credit.20
The Department of Revenue will conduct an auction for up to $14 million in available credits for each fiscal year. Credits may be carried forward for up to three succeeding tax years and apply to tax years beginning on or after Jan. 1, 2018, and before Jan. 1, 2024.21
Both S.B. 1528 and S.B. 1529 highlight the ability of states to selectively conform to provisions of the TCJA in order to maximize state revenue. If Oregon did not proactively decouple from selected IRC sections it adopted by default, it could have lost millions of dollars related to the federal deductions provided under IRC Section 965 and IRC Section 199A.
In recent years, Oregon has faced a continuing budget shortfall that the legislature is still attempting to reverse. As a result, it is not surprising that the state chose to decouple from the state revenue decreasing provisions of the TCJA. Similarly, other states facing budget shortfalls will be incentivized to adopt the state revenue raising provisions of the TCJA while decoupling from the state revenue decreasing provisions of the TCJA.
Notably, S.B. 1528 drew heavy opposition in both the Oregon House and Senate as well as Oregon small businesses, who argued that it would harm small business. Ultimately, the legislation was passed along partisan lines. In response, the Oregon Small Business Association has announced that it has filed a ballot initiative for the 2020 general election that would require that “any tax advantages given to large, publicly-traded, and out-of-state corporations operating in Oregon would be automatically allowed for thousands of small businesses and solo entrepreneurs.”22
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