Taxes in Oregon for Small Business: The Basics

Entrepreneurs on the West Coast have several incentives to choose Oregon as the home for their small businesses. Oregon's neighbor to the south, California, has a much higher cost of living, as do many of the big cities in Washington, the state's northern neighbor. Many parts of Oregon, in particular the Portland area, feature growing, thriving, educated populations, along with several reputable universities that turn out new classes of qualified employees each 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, lower crime, and lighter traffic, and still reap the benefits of mild winters and temperate summers.

Tax Advantages for Small Business

While not a total tax bargain like some of the Sun Belt states, such as Texas and Florida, Oregon confers several tax advantages to small business owners that paint it in a favorable light, especially compared to California. Business owners in California are frequently assessed hefty taxes on business income and personal income derived from the business. In Oregon, by contrast, business owners pay one or the other. Moreover, personal income taxes in Oregon tend to be lower than in California, especially for high earners.

Until 2020 (when its Corporate Activity Tax took effect), Oregon had only one type of tax on businesses, and for the most part, it is only imposed on corporations and limited liability companies (LLCs) that elect to be treated as corporations. Most small businesses are set up as S corporations, LLCs not treated as corporations, partnerships, and sole proprietorships, meaning their business taxes in Oregon, if applicable at all, are minimal.

Oregon's Corporation Excise Tax

If a small business is set up as a C corporation or as an LLC that elects 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. While most small businesses are not C corporations, and few LLCs elect to be treated as corporations, this tax is important to understand since small businesses often grow into traditional corporations over time.

The corporate excise tax applies to corporations based in Oregon and is assessed on income from business conducted within the state. 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. For example, an Oregon corporation with a net income of $11 million owes a total of $826,000 in tax: $66,000 on the first $1 million and $760,000 on the remaining $10 million.

Oregon corporations that claim no net income or have net losses must still pay minimum taxes based on total sales. This minimum tax ranges from $150 for sales under $500,000 to $100,000 for sales in excess of $100 million.

Businesses not set up as corporations are mostly shielded from Oregon's corporation excise tax. However, certain non-corporation business types must pay a minimum excise tax of $150. This minimum tax applies to S corporations and all LLCs classified as partnerships.

C Corporations

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 due is the greater of the two calculated amounts. Corporations are separate entities from their owners for tax purposes, and therefore income does not pass through. However, these owners can still be taxed at the state level on certain income they derive from having a stake in the business. Capital gains and dividends are taxed at the taxpayer's marginal income tax rate, which can be as high as 9.9%.

S Corporations

S corporations operate like C corporations in that they set up separate entities that confer to business owners and their personal assets a host of legal and financial protections. The distinction between the two is the S status files with the Internal Revenue Service (IRS), which allows income derived from sales to pass through the corporation to its owners. Because the owners then pay personal income tax on this money, the federal government does not charge the business a corporate tax, considering this to be double taxation. Most states follow this philosophy as well. California is not one of them, but Oregon is, with the exception of a $150 excise tax that must be paid by S corporations.

For example, an Oregon S corporation with a net income of $20 million still pays only $150 in tax. This income then passes through to the owners, who pay personal state income tax on it at marginal rates that run from 4.75% to 9.9% based on total income.

LLCs

LLCs are pass-through entities that can be classified in different ways. This classification determines an LLC's tax treatment in Oregon. The default LLC classification is as a partnership for businesses owned by multiple persons and as a disregarded entity for businesses owned by individuals. For LLCs classified as partnerships, taxes are the same as for S corporations. The business owes the minimum excise tax of $150, while the business owners pay personal income tax on the income that passes through. For LLCs classified as disregarded entities, no business income tax applies; only personal tax is owed on the pass-through income. In some rare cases, an LLC elects to be treated as a corporation. When this is the case, the same tax rules as for Oregon C corporations apply to the LLC.

Partnerships and Sole Proprietorships

In the majority of partnerships and sole proprietorships, the business owner receives their share of income from the business directly, and it does not pass through the company. In these cases, Oregon does not impose any income tax on the business, even the minimum excise tax of $150. The business owner pays personal state income tax at ordinary rates based on which of Oregon's four tax brackets they fall under. The only exception is for LLCs that file partnership tax returns. In this situation, the business is responsible for paying Oregon's minimum excise tax of $150.