January 1, 2020 marked the start of Oregon’s new Corporate Activity Tax (CAT), but many questions still linger. Trusted Hillsboro, OR accounting firm, Fordham & Co LLP, is here to help!
We’ve answered some of the most common questions surrounding the CAT so there will be no surprises come tax season.
Q: Who is subject to the CAT?
A: The tax is imposed on taxpayers with a trade or business and “substantial nexus” in Oregon. Most types of organizational entities that have “commercial activity” generated in Oregon in the regular course of their trade or business and also meet certain specific thresholds will be taxed, including partnerships, individuals, limited liability companies, trusts, etc.
Q: What is “substantial nexus”?
A: A business has substantial nexus in Oregon if it:
- Owns or uses a part or all of its capital in the state
- Holds a certificate of existence or authorization issued by the Secretary of State’s office
- Has a “brightline presence” in Oregon, defined as any of the following:
- Owns property in Oregon with an aggregate value of at least $50,000
- Has Oregon payroll of at least $50,000
- Has commercial activity in the state of at least $750,000
- At least 25% of the total property, payroll or commercial activity is in Oregon
- Is a resident or domiciled in Oregon for commercial, corporate, or other business purposes
Q: What is “commercial activity?”
A: Commercial Activity is the total amount arising from transactions and activity in the regular course of the taxpayer’s trade or business, without deduction for expenses incurred.
For the most part, many businesses will think of this as their gross sales, but there are exceptions. They fall into two categories:
- “Excluded persons” (non-profits, some health care providers, etc.)
- “Gross receipt exemptions” (non-trade interest income, excise taxes collected from customers, wages received as an employee, etc.)
Q: What are the specific thresholds a business must meet in order to be taxed?
- Any business with Oregon “commercial activity” over $750,000 will need to register.
- Any business with Oregon “commercial activity” over $1,000,000 will need to file.
- Any business with Oregon TAXABLE “commercial activity” over $1,000,000 will need to pay the CAT tax.
Q: Why is this tax charged?
A: The CAT is paid for the privilege of doing business in Oregon.
Q: What will the CAT fund?
A: The CAT will be set aside and used exclusively for education and school purposes. It will be the primary mechanism that funds the Fund for Student Success. Oregon expects that the tax will raise about $1 billion in new revenue annually.
Q: When is the first CAT due?
A: The first estimated tax payment is due April 30, 2020. All CAT filings must be done on a calendar year basis, regardless of any fiscal year end for the taxpayer.
Q: How much is the CAT tax?
A: It is 0.57% of your Oregon TAXABLE commercial activity over $1,000,000 plus $250. If you do not have Oregon taxable commercial activity over $1,000,000, then you will not owe any tax, including the $250 minimum tax.
Q: What is Oregon taxable commercial activity income?
A: Oregon taxable commercial activity is: commercial activity apportioned to Oregon, minus 35% of the greater of:
- Oregon cost inputs or
- Oregon labor costs
*This subtraction is limited to 95% of the Oregon commercial activity.
What this means is that only Oregon commercial activity is included and non-Oregon activity is excluded. From there, a taxpayer can subtract out 35% of certain costs that are apportioned or sourced to Oregon.
Q: What if a taxpayer has more than one business?
A: This is one of the most complicated areas of the new law. The Oregon CAT requires a taxpayer to look at their businesses as a “unitary business” rather than separate businesses. The draft regulation’s general rule is that “if the activities of one business either contribute to the activities of another business, or are dependent upon the activities of another business, those businesses are part of a unitary business.”
Q: Why are multiple businesses looked at as unitary businesses?
A: This concept was designed for the situation where on a separate business basis, some of the businesses would not be subject to the CAT. But if aggregated into a unitary business, then they would meet the thresholds and therefore be subject to the tax. A unitary business must file their CAT tax returns on a unitary basis, even though they are separate taxpayers for other purposes.
Important Oregon CAT Information
The Department of Revenue is still working out some kinks. You can find more information here, but in a nutshell, this is what you need to know:
- A taxpayer must register if their business or trade’s commercial activity is at least $750,000. If not previously required to register, the taxpayer must register within 30 days of reaching the $750,000 threshold or face per month penalties.
- Estimated taxes are required to be paid quarterly if the CAT will be greater than $5,000 for the year.
- Due April 30, July 31, October 31 and January 31 for the previous quarter.
- All estimated tax payments must be paid electronically.
- The annual tax return is due April 15 of the following year.
- The first annual return filing will not be due until April 15, 2021 for the 2020 tax year.
- A six-month filing extension may be granted only for “good cause.” Extensions do not appear to be automatically granted.
- Unitary groups must file as a single taxpayer. Each member will be jointly and severally liable for the filing and payment of the estimated taxes and the annual filing and taxes.
CPA for Oregon Corporate Activity Tax Help
Every business has its own unique situation, and since the CAT is new and complex, it is best to speak to a certified public accountant (CPA) in Oregon as soon as possible. The information from the Oregon Department of Revenue is still evolving and the only way to ensure your tax preparation is handled properly is by meeting with an experienced tax consultant who can navigate the new CAT.
Our Washington County tax advisors can help you understand how the CAT will impact your business and what you need to do if you are subject to the tax.
For tax, business, estate and financial advisory services, and more, contact the Portland, OR accountants at Fordham & Co LLP today!