Please read this information first.
The law allowing the Deferral of Reinvested Capital Gain" expired on December 31, 1999. You may not claim the deferral on your income tax return for tax years 2000 or later. If you are filing a delinquent return for tax year 1997, 1998, or 1999 and met the qualifications shown on the form, you may claim the deferral of reinvested capital gain on the delinquent return.
Oregon allows certain taxpayers to elect to postpone paying income tax on certain capital gains. The deferral is for transactions that cannot be deferred at the federal level. It is meant to be an incentive to reinvest in Oregon businesses. The deferral may be elected for certain assets sold or disposed of on or after January 1, 1996, and before January 1, 2000. You must make a qualified reinvestment within six months of the date (before or after) the asset was sold and before January 1, 2000.
Who may make the election?
Eligible taxpayers are individuals, partnerships, limited liability companies, limited liability partnerships, and S corporations. C corporations cannot make this election.
Which gain qualifies?
You must have capital gain from the sale of an asset used in a business, held for the production of income, or that meets the definition of "expansion shares." For example, capital gain from the sale of a warehouse, manufacturing equipment, breeding livestock, business cars, and rental property may be deferred.
Ordinary gain and gain from accounts receivable, copyrights, or investment property (other than expansion shares) do not qualify. Investment property generally means property that produces interest, royalties, or dividends.
Reinvestment of proceeds
Reinvestment of proceeds must be made directly or indirectly in a qualified business asset. Or you may obtain an interest in a qualified business activity or a qualified investment fund.
Your basis in the qualified business property is not reduced by the amount of capital gain deferred.
You must reinvest within six months (before or after) of the date the asset was sold. If gain was reported by a partnership, S corporation, limited liability company, or limited liability partnership, you can make the reinvestment as an individual. You must reinvest within six months of the entity´s year-end.
How much gain may I defer?
You may defer the amount of gain determined under federal law, with any required Oregon modifications.
The amount of capital gain you may defer is the portion of capital gain considered reinvested. Use the following formula to calculate the amount of gain you may defer:
Proceeds reinvested
Total proceeds – federal tax
attributable to the capital gain. |
X |
Capital gain |
= |
Capital gain eligible for deferral |
Example: Bob sold an asset for $110,000 with a basis of $10,000, resulting in $100,000 capital gain. Federal tax on the capital gain equals $20,000. Bob reinvests $50,000 of the proceeds in a qualifying business asset.
Bob may elect to defer $55,555 of the $100,000 gain for Oregon purposes. (Proceeds of $110,000 less federal tax of $20,000 = $90,000; $50,000 ÷ 90,000 x $100,000 = $55,555.) To defer all of the capital gain, Bob must reinvest at least $90,000. His subtraction would be $100,000.
How do I make this Election?
You must file an Oregon Deferral of Reinvested Capital Gain form with your Oregon return to report information about the asset sold and the qualified reinvestment of the capital gain. Contact the Oregon Department of Revenue to obtain this form.
What if I elect to defer but don´t reinvest?
If you filed a declaration of intent to reinvest, but did not actually reinvest, you must amend your original return and pay the tax on the amount previously deferred. Interest is charged from the date that the tax would have been due if you had not made the declaration until the tax is paid.
When must I recognize the deferred capital gain?
You must make an "addition" on your Oregon return in the event one of the following occurs:
- An asset that you have reinvested in ceases to be an asset held for use in Oregon in a qualified business activity.
- An investment fund ceases to be a qualified investment fund. However, if an investment fund holds an interest in an activity that is later disqualified, the fund has twelve months to dispose of its interest in that business.
- If the business ceases day-to-day operations or ceases to qualify.
- Note: In each of situations 1, 2, and 3, you may continue to defer capital gain if you file a declaration of intent to reinvest and meet all of the reinvestment requirements.
- If you or your estate dispose of an asset or interest due to your disability or death. However, if a related party assumes or inherits your interest or asset as a result of your disability or death, they may choose to continue the deferral of capital gain by making an election.
Terms
Adjusted Net Equity. The net equity of the business (total assets less total liabilities) plus all dividends or distributions made by the business.
Expansion shares. Shares of stock may be "expansion shares" if the business meets all of the following requirements:
- the stock has unlimited voting rights (or can be converted into shares that have those rights);
- the stock was issued directly to you (or to a partnership, S corporation, limited liability company, or limited liability partnership owned by you) in exchange for money or property to be used by the business in its operations;
- the business had less than $5 million in revenues during the 12 months immediately preceding the date of your first equity investment in the business.
In addition, at the time the shares were issued:
- the business did not have any publicly traded shares; and,
- the "adjusted net equity" of the business was not more than all previous equity investments made in the business.
Federal Tax Attributable to Capital Gain. This is the difference between the federal tax computed with the capital gain and without the capital gain.
If the capital gain is being deferred on the sale of an asset using the installment method of reporting, the taxpayer calculates federal tax attributable to the capital gain as if the capital gain had been fully reported in the year of sale. The amount subtracted on the Oregon return cannot exceed the amount of capital gain otherwise includible in Oregon taxable income.
If the reinvestment is less than the amount required for full deferral of capital gain, the taxpayer must prorate the subtraction over the life of the installment sale.
Qualified business asset. An asset that you hold for use in Oregon in a qualified business activity.
Qualified business activity. A business that meets all of these requirements:
- The business must be owned by an individual, partnership, limited liability company, limited liability partnership, S corporation, or C corporation.
- The principal place from which that trade or business is directed or managed is within Oregon.
- There aren´t more employees and independent contractors outside of Oregon than within Oregon.
- Investment income (interest, dividends, royalties, etc.) is incidental to the business and is not derived in the ordinary course of business.
- The business activity must be one listed in the Oregon statute. The list is derived from the Standard Industrial Classification (SIC) Manual, and includes activities such as:
- Agriculture, forestry, or fishing (Division A).
- Mining (Division B).
- Construction (Division C).
- Manufacturing (Division D).
- Transportation, communications (Division E).
- Wholesale trade (Division F).
- Retail trade (Division G).
- Some service activities will qualify, but some will not. Refer to the SIC manual.
- Some business activities don´t qualify for reinvestment, such as:
- Finance.
- Insurance.
- Real estate development or rental activities.
- Health services.
- Legal services.
Qualified investment fund. A partnership, limited liability company, limited liability partnership, or S corporation organized and operated only for the purpose of obtaining qualified business interests or qualified business assets. The fund may acquire investment property on an interim or incidental basis only until a suitable qualified business interest or qualified business asset is located by the fund.
Taxpayer assistance
General tax information
Salem: 503-378-4988
Toll-free from an Oregon prefix: 1-800-356-4222
Asistencia en español
Salem: 503-378-4988
Gratis de prefijo de Oregon: 1-800-356-4222
TTY (hearing or speech impaired; machine only):
Salem: 503-945-8617
Toll-free from an Oregon prefix: 1-800-886-7204
Americans with Disabilities Act (ADA): Call one of the help numbers for information in alternative formats.
150-101-614 (11-98)
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