ODR Not Following Their Own Instructions

Well, I survived another brutal tax season, and unfortunately I still have a ton of extended returns to get out in the next week, but the last thing I need is ODR wasting my time with incorrect notices to clients that force me to double and triple check OR PTE calculations.  I had to post this really quick in case there is anyone else out there with this scenario:

  • Filed an OR 40P Part-Year Resident return for 2015?
  • Was Schedule OR-PTE-PY included?

If both apply to you and you have received a letter from ODR with a proposed refund adjustment, then there is a good chance that their adjustment is incorrect – especially if they are proposing a lower tax amount that is equal to the tax on the OR-PTE-PY form, Section B, line 19a multiplied by your Oregon percentage from Form 40P, line 35.

The OR-PTE-PY is new this year, and the worksheet in Section B can be very confusing the first time through, but the most important thing is the the worksheet already multiplies the tax amounts by the Oregon percentage and the Oregon non-passive percentage, so by the time you get to line 19a, it is already pro-rated.  For this very reason, ODR lists specific instructions below line 19a “Don’t multiply the tax by the Oregon percentage as instructed on line 48 of the Form 40P.” .  However, on the notice I received, they have done just that in their proposed tax number – they have multiplied the amount on line 19a from OR-PTE-PY Section B by the Oregon percentage, which is incorrect.  We had even clearly marked box 47c on Form 40P as they requested, but they still made the error.

The thing that frustrated me is that the return was transmitted on 4/14/16 and they had a letter sent out on 4/22/16, which means a machine is likely kicking these out without any manual review and this could result in a large number of erroneous tax refunds.  This is a waste of everyone’s time and money, and coupled with the disastrous late release of OTTER 2016, I am starting to think Oregon needs to following Intel’s lead and clean house at ODR and OED.

 

 

Manual Review: Oregon Department of Revenue’s Refund Delay Tactic?

If you have an overpayment of over $5,000 on your Oregon tax return, be forewarned – the Oregon Department of Revenue may sit on your refund for up to six months while they “manually review” your return.

In the last year, we have witnessed a sharp increase in the number of clients who had their refund delayed by ODR.  The only common factor we can find is that they all had large overpayments.  In each case, the return was selected for “manual review”, and after weeks and sometimes months of waiting, ODR asks for something as simple as copies of the W-2s (which they should already have since employers are now required to efile W-2s to Oregon).  Even after you supply them with copies of the W-2s, the manual review and refund can often take weeks to process.  Even worse, when you call them, they offer very little information into why the manual review was triggered in the first place and cite their “policies” without letting you speak to a manager.

If I had to venture a guess as to the reason for these delays, I would point to the embarrassing $2.1 million dollar refund error that ODR made last year.  In fact, soon after that error is when our clients started encountering these manual review delays.  Could overreaction be the cause of these delays, or are they simply a fumbling bureaucracy that cannot process refunds in a reasonable period of time?

You can draw your own conclusion, but what I do know is that I am changing my tactics when I have a client with a large Oregon overpayment.  From now on, I am applying the entire overpayment to the next year and then the client can just pay less in estimates during the year.  That way, ODR can take an entire year manually reviewing the return to their hearts content and it will not delay refunds for my clients.

If your 2012 return has been selected for manual review, I would love to hear from you.  There is little advice I can give you other than calling ODR every other day, but the more taxpayers voicing concern about this, the better.  This needs to be given proper attention, as ODR is wasting the time and money of honest Oregon taxpayers and small business owners.

Feature on “It’s Only Money” Blog – OregonLive.com

Check out Brent Hunsberger’s blog post: “Do Washingtonians pay income taxes if they work in Oregon?”

My answer on the issue is featured in the post.

It is a great blog – I definitely recommend checking it out on a regular basis.

We are also in the Sunday Oregonian column entitled: “Act Now to Save on 2009 Tax Bill”.  See the small business section for some planning tips.  I will be featuring more year-end planning ideas on this blog over the next few days.

Oregon Income Tax Increases – Sales Tax in Disguise?

Recent articles in The Oregonian laid accolades on the Oregon legislature for all they have done for us during this last session–really important things like banning puppy mills, making it illegal to “top off gas tanks when filling,” requiring calorie counts on chain restaurant menus, and raising the cost of higher education, which, by the way, has increased tenfold in the last 15 years.  Don’t get me wrong, I have always been against the way pet stores have bred the poor puppies in rotten conditions, but I take exception to giving accolades to our government officials during a time of economic stress for spending so much time on trivial pursuits and for not delving into the real reasons behind our budget problems.

I won’t elaborate on the fact that raising taxes historically has produced less income to the government than when tax rates were lowered.  The fact is when more income is generated, more tax is paid.  When the incentive and ability to make money are lowered by raising taxes, less revenue is generated.  Instead I will explain with an actual example how the changes this legislature made during this economy will, in fact, make many businesses think harder about closing their doors and relocating across the river. I will also point out that many businesses this year with between two and twenty  million dollars in sales will possibly have losses, not income.  I will of course acknowledge that my view is somewhat skewed to an observation of only the 120 corporate clients I have firsthand experience with, but this is most likely a reasonable sample of small business in Oregon.

Currently in Oregon, all business entities established as C-corporations filing federal Form 1120, or set up as pass-thru entities such as multi-member LLCs filing federal Form 1065, and S-Corporations filing federal Form 1120S pay a minimum tax of $10 per year.  If the entity was a C-corporation, it would pay tax on its net taxable income at 6.6% but not less than $10, whereas the pass-thru entities only pay the $10, as their net taxable income is “passed through to the individual owners,” and the owners ADD it to their personal income tax returns and pay personal taxes on the combined amount.

Effective for tax years beginning on or after January 1, 2009, the minimum tax on  pass-thru entities goes to $150; however, for taxable C-corporation entities, the minimum tax will be based on the gross Oregon sales, regardless if the corporation has a net taxable income or not. I have long felt the $10 minimum was way too low. It takes much more than $10 to administrate the filing of these returns. I even feel that $150 is low. California, which has one of the nation’s highest minimums, is $800. However, to base the minimum on gross sales for a taxable C-corporation entity is nothing more than a disguised attempt to charge the entities a sales tax.

What the legislature and our governor do not understand is that small businesses provide much more in terms of long-term revenue to our State, regardless of whether they end up with a net taxable income. Let me give you the following example from an actual business that has operated in this state since 1971, employing between 50 and 100 people per year.

This company has an average of $19 million in sales per year and averages 60 employees, so the payroll is an average of $3.2 million per year. The company is a wholesale operation and purchases $12 million worth of products per year. The company provides health insurance and retirement benefits to its employees. It also pays rent to another Oregonian for $350,000. Sometimes we believe that the owner is taking a majority of the $3.2 million in wages.  However, in this example, the owner averages $200,000 or less. Now here is the kicker:  Because this company is generous to its work force, hiring, paying health insurance, retirement, and other expenses, its average annual net income is less than $200,000. And due to economic conditions, last year and this coming year, it will actually have zero net income.

Here is the problem with the current change to the C-corporation minimum tax:  This corporation, and many others like it, will provide jobs to Oregonians, will provide health insurance to Oregonians, will provide revenue to other entities from purchasing products, both in Oregon and across the country, will provide revenue to another entity for rent, will provide retirement to people who might not otherwise save, and for its efforts will pay Oregon $7,500 in minimum tax. In addition, Oregon will pick up revenue from the $3.2 million in wages, both in employment-related taxes and income taxes from those individuals, and from the $350,000 in rent. If you do the math, here is how it looks:  When the corporation makes a net of $113,636, it would pay 6.6%, or $7,500. But if it has a loss of, say, $100,000 and makes nothing, it would still pay $7,500.

Now, let’s examine this same company if it were a pass-thru entity meaning, again, that the net income or loss would be added to the individual’s return and taxed with the personal income. Let us further assume the owner received a salary of $200,000, owned a home with a mortgage and property taxes and, being generous, gave to various charities so that the owner had itemized deductions of $35,000, including a state income tax of $10,000. His state tax under these conditions would be approximately $15,000. Now, if the company had a loss of $100,000, which will be likely during these economic times, his Oregon tax, which would include the company, would go down to $6,000, plus the company’s minimum Oregon tax on a pass-thru entity of $150.

Here is the comparison:  Nothing else in the company is different other than whether it is a pass-thru entity or a C-corp. The owner’s salary is the same, the company expenses and operations are the same. But in one case, the loss saves the taxpayer $9,000 in Oregon taxes, and in the other case, because it is a C-Corporation, not only does the individual still pay $15,000 but the corporation is out another $7,350, for a total difference of $16,350. Even if there isn’t a loss and the company just breaks even, the difference is the minimum tax of $7,350. All this is only because of the type of entity the business chose years ago.

I do not believe the Oregon legislature understands the tax system, or they are more concerned with just showing they did something rather than developing a well thought out change that does not penalize the only source of revenue that they need to correct their budget problems. That source is the working America.

Oregon 2009 Individual Income Tax Increases

In our previous post, we discussed the Oregon business tax increases resulting from House Bill 3405, which passed the Oregon Senate last Thursday.  Coupled with HB3405 is the sister bill regarding individual tax increases – House Bill 2649.  This bill is also headed for Governor Kulongoski, who has already made a statement of support for the bill, so now is the time to start looking at the details and adjusting your estimated tax payments if needed.


Individual Tax Rate Increases

For tax years beginning on or after January 1, 2009, the Oregon income tax rate increases for individuals with taxable income of more than $125k is as follows (previous tax rate was a flat 9% at these income levels):

  • 10.8% on excess taxable income over $125k but under $250k
  • 11% on excess taxable income over $250k

For tax years beginning on or after January 1, 2012, the 10.8% rate is reduced to 9.9% for excess taxable income over $125k but under $250k; however, the 11% rate for excess taxable income over $250k remains the same.

The tax rate on taxable income under $125k remains unchanged at 9%, so we are just talking about the income above $125k here.  For a more detailed breakdown of the rates at different income levels, see page 2 of HB2649.


Phase-Out of Federal Income Tax Subtraction

HB2649 also creates a new phase-out of the Federal income tax subtraction that starts at $125k for single taxpayers and $250k for married filing joint.  Under current law, there is no phase-out of the subtraction and as of 2008, the maximum deduction was $5,600 MFJ or $2,800 single/MFS.  Below are the phase-out windows for the subtraction under HB2649 beginning January 1, 2009:

  • Single/MFS – phase-out starts at $125k with complete phase-0ut at $145k.
  • MFJ –  phase-out starts at $250k with complete phase-0ut at $290k.


Not All About Tax Increases

There are some small “benefits” they threw into HB2649:

  • Oregon will exempt the first $2,400 of unemployment income received.
  • They will not charge penalty and interest to taxpayers that underpay as a result of the tax increases (how gracious of them).

I am sure they will be releasing more detailed information after the Governor signs this into law, but hopefully this helps give you an basic understanding of the new changes.  To get an idea of the impact of the tax increase, review these 2006 Oregon tax statistics.

If you will be affected by these tax increases, be sure to call your CPA or tax professional as you may want to revise your remaining Oregon estimated tax payments for 2009 – or at least get an estimate of the additional tax that will be due.

Oregon Business Tax Increase Update

As many of you may already know, there was a bit of drama last Wednesday in the Oregon Senate when House Bill 3405, which increases taxes on corporations and businesses in Oregon, was derailed by just one vote.  However, Thursday the vote changed and bill passed the Senate,  and now it is on its way to Governor Kulongoski, who has already made a statement about it leaving no doubt that we need to start preparing the changes.

All businesses in Oregon or doing business in Oregon are affected by this change – whether you have a C-Corporation, S-Corporation, LLC, LLP, or partnership, you will be paying more for Oregon excise tax, filing fees, and annual registration fees.  Here is what you will need to know:


Increased Minimum Excise Tax

The low $10 minimum tax for filing business entities (not including disregarded entities) has been increased to $150 for tax years beginning on or after January 1, 2009.  For C-Corporations, the minimum tax of $150 only applies to corporations with Oregon sales less than $500k.  C-Corporation with Oregon sales over $500k will now pay a minimum tax based on a multi-tiered calculation based on the level of sales.


C-Corporation Minimum Excise Tax Increase

Oregon minimum excise tax for C-Corporations can now range from $150 all the way up to $100k depending on the level of Oregon sales.  For a complete breakdown of the tax based on Oregon sales tiers, see page 2 of HB3405.  Here is a quick summary of the minimum tax amounts for smaller businesses:

  • Oregon sales over $500k but under $1 million = $500 tax
  • From $1 million to 2 million = $1,000 tax
  • From $2 million to 3 million = $1,500 tax
  • From $3 million to 5 million = $2,000 tax

In addition, the tax rate for C-Corporations increases from 6.6% (current rate) to 7.9% for taxable income in excess of $250k.


Filing Fee Increases

In addition to tax increases, HB3405 will double most business registration filing fees with the Oregon Secretary of State from $50 to $100.  Some filing fees, like those for authority to transact business in the state,  will increase to $275.


Increased Document Fees

Most copy and certificate fees will also increase at the Secretary of State’s office.  In addition, the notary public fees will increase from $20 to $40.

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All in all, the increases are not a surprise for most of us.  The Oregon excise tax has been much lower than similar taxes in most states, and there was talk before the recession about increasing the tax to $50.  However, for the small business owner in Portland, this is not the best news – especially after the Multnomah County minimum tax increase for 2008.

For those of you with C-Corporations, you may want to talk with your CPA regarding the cost to convert to an S-Corporation.  For many, the large amount of built-in gains tax would not make the conversion worthwhile, but with this tax increase and the likely upcoming expiration of qualified dividends and low capital gains rates, it is definitely worth looking into as some could see long-term tax savings.