If you have qualifying business income from a sole proprietorship, a partnership, or an S corporation, you may elect to calculate your Oregon income tax using a reduced tax rate for that income.
The tax rate on qualifying business income is:
- 7 percent of the first $500,000;
- 7.5 percent for amounts above $500,000 but not more than $1 million;
- 8 percent of the amount above $1 million but not more than $2.5 million; and
- 9 percent of the amount above $2.5 million but not more than $5 million. Qualifying business income that is more than $5 million is taxed at the maximum personal income tax rate of 9.9 percent.
Qualifications
Generally, to be eligible for the reduced tax rate, you must materially participate in the business, have at least the minimum number of qualifying Oregon employees, and meet any specific requirements for a sole proprietorship or for a partnership or S corporation.
Sole proprietorship
To be eligible for the reduced tax rate, a sole proprietor must:
- Have qualifying business income from the sole proprietorship;
- Materially participate in the business; and
- Employ one or more employees in Oregon who meet the employee requirements explained in the instructions for Schedule OR-PTE.
Partnership or S corporation
To be eligible for the reduced tax rate, a partner or S corporation shareholder must:
- Have qualifying business income from the partnership or S corporation;
- Materially participate in the business;
- Have ordinary business income that doesn't exceed $5 million;
- Employ one or more employees in Oregon who meet the employee requirements described below; and
- If ordinary business income is more than $250,000, comply with the employee-to-owner ratio requirement shown in the table in the instructions for Schedule OR-PTE or meet the income distribution requirement described in those instructions.
For more information, see the Schedule OR-PTE depending on your residency status. For full-year residents, see Schedule OR-PTE-FY. For part-year residents, see Schedule OR-PTE-PY. For Oregon nonresidents, see Schedule OR-PTE-NR.
Frequently asked questions
The only modification allowed
for qualifying nonpassive income is a depreciation addition or subtraction
attributable to qualifying business [ORS 316.043(4)].
Yes.
"Leased" employees are workers who are officially employed by a
professional employment organization, which is responsible for overseeing all
HR-related functions, but who perform work for the contracting business.
Because they're actually performing
the work for the business and the business is paying their wages, those
employees can make a business eligible for the reduced tax rate.
Yes. You must
"materially participate" in the business to qualify for the reduced
tax rate. "Material participation" has the same meaning in Oregon as
it does in IRC 469. Taxpayers may group related business entities into one
single activity in order to meet the 500-hour test for material participation
in Treasury Reg. 1.469-5T(a)(1). Nonpassive income from qualified
businesses that are grouped for the purposes of meeting the federal material participation
test would qualify for the Oregon reduced tax rate, assuming the business also
meets the other QBIRTR requirements.
Yes. As long as the family member is not an owner, member, or limited partner in the
business and worked at least 30 hours a week, those hours can be counted toward
the employee requirement for the reduced tax rate [ORS 316.043(6)].
Yes, the income would
qualify as long as it is nonpassive income from a business that meets the employee
requirement. All nonpassive income qualifies for the reduced tax rate except
for income from wages, capital gains, dividends, and interest income [ORS
316.043(1)(b)].
The 30-hour-a-week requirement is per employee, not per position. Example 1. Partnership B had one employee that worked a total of 1,440 hours during the year in Oregon. The employee worked 32 hours per week for 30 weeks and worked 24 hours per week for 20 weeks. Because only the weeks where the employee worked at least 30 hours are included, the employee had 960 total qualifying hours (32 hours x 30 weeks). Because there were less than 1,200 total qualifying hours worked in Oregon, the nonpassive income from Partnership B doesn't qualify for the reduced tax rate.
Example 2. Partnership D employed three employees during the year in Oregon. One employee worked 32 hours per week for 20 weeks and the other two employees each worked 40 hours per week during the same 20 weeks. The hours for each employee qualify because each employee worked at least 30 hours a week. Therefore, the Partnership D had 2,240 total qualifying hours.
Yes, if the electing PTE has qualifying business income
Yes, but only if the amended return is submitted on or before the original due date of the return, or if filing on an extension, on or before the extension due date [ORS 316.043(5)].
Example 1. Liam's return is due on April 15. He files his original return on March 1 and doesn't elect to use the reduced tax rate. He files an amended return on April 12 and makes the election. The election will be allowed, and his amended return will be treated as the original return.
Example 2. Maggie's return is due on May 17. She files her original return on March 12 and doesn't elect to use the reduced tax rate or file on extension. She files an amended return on November 2 and makes the election. The election will be denied because she is filing her amended return after the original due date and she didn't file on extension.
Example 3. Sam's return is due April 15. He files his original return on extension on May 3 and elects to use the reduced tax rate. The reduced tax rate election will be allowed since it was made on his original return.
Example 4. Allen's return is due April 15. He files his original return on extension on July 30 and doesn't elect to use the reduced tax rate. He files an amended return on September 1 and elects to use the reduced tax rate. His reduced tax rate will be allowed because his amended return was filed before the extension due date of October 15 and will be treated as the original for the reduced tax rate election.
Yes, as long as the business meets the employee requirement. For the purposes of
the reduced tax rate, Oregon is tied to the federal definition of material
participation under Internal Revenue Code, Section 469. Income or losses for
both spouses are nonpassive even if only one spouse rises to any of the seven
tests for material participation.
It is the aggregate of all employees meeting the 30-hours-a-week requirement. However, if the business must have more than one employee to meet the
owner-to-employee ratio requirement, with more than 1,200 total hours required,
no more than 1,200 hours worked by a single employee can be counted toward the
total required hours.
Example 1. Partnership A employed three employees during the year. During the year, two employees worked 40 hours per week for eight weeks (or 640 total hours) and one employee worked 40 hours per week for 24 weeks (or 960 total hours). The total of the qualifying hours for this partnership is 1,600 hours. All the hours qualify even though no single employee's hours met the requirement.
Example 2. S corporation B must have two employees working a total of at least 2,400 hours during the year to meet its owner-to-employee ratio requirement. During the year, one employee worked 40 hours per week for 25 weeks (or 1,000 total hours) and one employee worked 40 hours per week for 40 weeks (or 1,600 total hours). Although the total of the hours worked is 2,600 hours, S corporation B doesn't qualify for the QBIRTR because only 1,200 hours can be counted for a single employee, for a total of only 2,200 qualifying hours.
Any amount that is added back for the PTE-E tax that meets the conditions for the QBIRTR may be treated as qualifying income. If the distributive income from the PTE is a mix of qualifying and nonqualifying income, the portion of the addition that is qualifying income can be found using this ratio: (Qualifying income included in total distributive income ÷ Total distributive income) x Addition amount.
Example. Rhoda is an owner of a PTE that makes the PTE-E election. Her share of distributive income from the business is $100,000. Of that amount, $80,000 is nonpassive income that qualifies for the QBIRTR. Her PTE-E addition is $10,000. The portion of the addition that she can include in qualifying income for the QBIRTR is $8,000 [($80,000 ÷ $100,000) x $10,000].
The election for the QBIRTR is made annually. To make the annual election, calculate the tax using the appropriate Schedule OR-PTE for your residency status and check the "Schedule OR-PTE" box on the Oregon tax line of your return. Include the schedule when you file your return.
No, neither the QBIRTR statute (ORS 316.043) nor any other statute provides for an Oregon subtraction if the contributions are taxed and not allowed as a deduction. Therefore, even though the income could be double-taxed by Oregon and another state (both the IRA contributions and as part of the IRA distributions), there's no subtraction allowed for amounts previously taxed by the other state.
To qualify for the QBIRTR, the sole proprietorship, partnership, or S corporation must have nonpassive income. “Nonpassive income" is income other than that from passive activities as defined in section 469 of the Internal Revenue Code (IRC). It includes, but isn't limited to, nonpassive income reported on federal Schedules C, E, and F, IRC section 1241 gains treated as ordinary income, guaranteed payments, and royalties. It does not include wages earned by the business owner, or interest, dividends, or capital gains of the business. Income from trusts or estates doesn't qualify for the QBIRTR.