Following Oregon Governor Kate Brown’s release of a short budget calling for a tax increase on mostly small businesses, Democrats released a tax bill for a third Special Session that also hits mostly small businesses. Despite the cry for more federal money the Governor’s budget is aimed at an additional $55 million to prop up her new freeze estimated to increase unemployment for 51,000 more Oregonians. Along with the undistributed federal stimulus funds, her budget states, “Oregon remains in a healthy position to meet future challenges. The budget includes over $293.8 million in increased revenues and leaves $243.3 million in the General Fund. In addition, by the end of the 2019-21 biennium, the Rainy-Day Fund is projected to have a balance of $942.3 million.”

In light of all the prudent savings, why are Democrats proposing a bill in the form of Legislative Concept 2 to disconnect Oregon Tax Returns from federal tax provisions for certain net operating costs, including federal repeals of previously enacted limitations on deductions by requiring additions to federal taxable income for Oregon tax purposes? Businesses taking advantage of carryback deductions did so to cover operating losses. Now they are being told to recalculate their taxes.

Oregon has a rolling tie to changes made to the definition of federal taxable income. Most information to support the amounts on Oregon’s return comes from the federal return. Even when Oregon law differs from federal law, the state still needs information from the federal return (ORS 314.380).

ORS 316.028(1) requires that in the computation of state taxable income the net operating loss, net operating loss carryback and net operating loss carryforward shall be the same as that contained in the Internal Revenue Code as it applies to the tax year for which the return is filed, and shall not be adjusted for any changes or modifications contained in this chapter or by the case law of this state.

The proposed LC 2 changes ignores that filings “shall not be adjusted…” and adds to the federal taxable income an amount equal to excess business loss deducted going back to January 1, 2018 and a termination date of January 1, 2021, clearly expects failing business to fill-in for lost revenue.

Section 3 adds the sum of the carryback deduction and the amount that net operating loss deduction exceeds 80% of adjusted taxable income. Adds back any carry-back amounts and net operating losses to January 1, 2018 terminating January 1, 2021.

Section 4 adds federal taxable income the amount by which business interest deducted that exceeds 30% of current tax year adjusted taxable income. That 30% isn’t protected. Under Section 6 it adds back to the federal taxable income that 30% deducted. Applies to years 2019-2020.

Some think it is unconstitutional to change taxing retrospectively, as it is with any contract -- not to mention that the Governor’s proposed budget increases taxes on small businesses harder than big corporate businesses. Business closures have impacted small businesses the hardest without relief in sight.

Oregon Constitution, Article IV, Section 25(2) requires a “three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” However, clever labeling has allowed many backdoor taxes to be passed by the legislature. LC 2 is no exception.

Proposed is the reinstatement of lower limitation on business interest deduction, limitations on deductions for excess business loss and net operating loss carryforwards. It disallows a five-year carryback of net operating loss, for Oregon personal income tax purposes, but waives any penalties or interest due to recalculation on what has prior approval.

“Section 10. This 2020 third special session Act takes effect on the 91st day after the date on which the 2020 third special session of the Eightieth Legislative Assembly adjourns sine die.” That projects an effective date of mid-March, just in time for businesses to come up with a pot of money to pay additional taxes on April 15 to cover past problems they thought were resolved with prior tax filings.


--Donna Bleiler

Post Date: 2020-12-08 10:48:30

Last Update: 2020-12-08 10:55:20