Oregon Corporate Activity Tax and Its Effect on Dental Practices
Oregon Governor Kate Brown has signed legislation that imposes a corporate activity tax (CAT) on each person with taxable commercial activity for the privilege of doing business in Oregon.
The following are some of the details specific to the new Oregon CAT:
• The CAT is applicable for tax years beginning on or after January 1, 2020.
• The tax is equal to $250 plus the product of the taxpayer’s taxable commercial activity in excess of $1 million for the calendar year multiplied by 0.57%.
• Any dentist with commercial activity in excess of $750,000 during the year must register with the Oregon Department of Revenue.
• Any dentist with commercial activity in excess of $1 million in 2020 must file by April 15th, 2021.
• Estimated tax payments will be required and payable the last day of the month following the previous quarter (January, April, July, and October).
• Dentists subject to the tax include, but are not limited to, individuals, partnerships, C corporations, S corporations, and estates.
• The new tax is not considered transactional, so it is not subject to the rules of Public Law 86-272, which allows income tax exemption for sales of tangible personal property in certain circumstances.
• The term “commercial activity” means amounts realized by a person from the transactions of a trade or business.
• Dentists will be allowed to subtract from the commercial activity sourced to the state 35% of the greater of cost of goods sold or labor costs. In general, 35% of labor costs will be used as the subtraction. Note: The labor above $500,000 for an individual employee is not included in the subtraction.
• Not all income is considered in the commercial activity base. The bill excludes but is not limited to the following; interest, dividends, sales of dental equipment, and distributions received by owners.
As with any major new tax bill, there are many parameters and definitions unknown. We expect the Oregon Department of Revenue and legislators to clarify the rules and regulations.
Given the impact and a quickly approaching effective date of January 1, 2020, it is important to start discussing now and begin planning for the economic impact. Below are examples showing a practice that pays the minimum, and two other practices with varying amounts of income.