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Oregon Corporate Tax Planning in Response to Measures 66 and 67

January 28, 2010

Passage of Measures 66 and 67 by Oregon voters results in retroactive increases in Oregon income tax for certain individuals and for all "C" corporations filing Oregon income tax returns. Those increases are retroactive to January 1, 2009. The changes are permanent. In some cases the new tax rates will decrease slightly over the next few years, but even in most of those cases the new tax rates will eventually settle at levels in excess of the rates in effect through 2008.

Changes made by Measure 67 to the Oregon taxation of "C" corporations include (i) increase in the rate of tax on corporate profits subject to Oregon tax, (ii) increase in the corporate minimum tax from $10 to $150 regardless of the level of sales or profits, and (iii) for certain "C" corporations, a minimum tax based on a percentage of Oregon gross revenues regardless of profits. That new minimum tax based on gross revenues applies to "C" corporations with Oregon gross revenues in excess of $500,000. That new tax might be particularly burdensome on "C" corporations that conduct high volume, low-margin businesses, especially during a down economy.

"C" corporations which file Oregon tax returns may have planning opportunities available to minimize overall Oregon taxes payable for 2010 and beyond by those corporations and their shareholder families. One such planning opportunity may be filing of an election by the shareholders of a "C" corporation to be taxed as an "S" corporation. For calendar year "C" corporations, in order for such election to be retroactively effective to January 1, 2010, the election would have to filed with the IRS by March 15, 2010.

There are restrictions under the Internal Revenue Code on who can qualify as an "S" corporation. The principal restrictions concern the number and type of shareholders and the capital structure of the corporation.

There are a number of factors to be considered in determining whether it is better long-term for the shareholders of a closely held corporation to be taxed under Subchapter "S" vs. having the corporation taxed under Subchapter "C." Oregon Measures 66 and 67 add an important factor to that analysis, especially for "C" corporations currently filing Oregon tax returns.

We recommend that shareholders of Oregon "C" corporations consult soon with their tax advisers to determine whether there are long-term benefits from making an "S" election. Black Helterline LLP has an active individual and corporate tax practice. We would be pleased to assist with consideration of these issues.