Larry's Tax Law

Senate Bill 1507 (“SB 1507”), which aims to disconnect Oregon’s state tax laws from a few provisions of the Internal Revenue Code (the “IRC” or the “Code”), was recently passed by the Oregon Senate and the Oregon House of Representatives.  There is no sign that Governor Tina Kotek intends to veto the legislation.  Consequently,  in accordance with Section 49 of SB 1507, it will take effect on the 91st day after the date on which the 2026 regular session of the 83rd legislative assembly adjourns sine die.  If my math is accurate, SB 1507 will be effective around June 8, 2026.   

The revenue impact of SB 1507, as reported by the Oregon Legislative Revenue Office, is a savings for the state of approximately $300 million during the 2025-2027 biennium.  The question that follows is how SB 1507 creates the huge revenue savings.

As reported last week, Senate Bill 1510 (“SB 1510”) was passed by the Oregon Senate on February 24, 2026.  It was passed by the Oregon House of Representatives on March 4, 2026.  Now, it sits on Governor Tina Kotek’s desk awaiting her signature.

One of our readers asked me a simple question: “What happens next in the legislative process?”  As I commenced to answer that question, with his assistance, I quickly realized that taxpayers and tax practitioners do have something to worry about.  That worry relates to how SB 1510 was drafted. 

In accordance with Section 15b of Article V of the Oregon Constitution, after a bill passes both the House and the Senate, before it becomes law, it is presented to the Governor for action. The Governor can take one of three actions:  (i) she may sign the bill into law, (ii) she may allow a bill to become law without signature, or (iii) she may return the bill to the legislature or the Oregon Secretary of State with objections.

As reported earlier, Senate Bill 1510 (“SB 1510”), if passed and signed into law by Governor Tina Kotek, would extend the life of the Oregon state and local tax (“SALT”) workaround for eligible pass-through entities for two more tax years (i.e., through the 2027 tax year). 

SB 1510 was passed by the Oregon Senate on February 24, 2026.  That same day, it was introduced in the Oregon House of Representatives (“House”).  Yesterday, March 4, 2026, it received unanimous approval by members of the House (52 “yea” votes, with eight representatives absent).  Now, SB 1510 will be delivered to Governor Kotek for signing.  She is expected to sign SB 1510 into law.[1]

Two of our readers alerted me yesterday afternoon that Oregon lawmakers are attempting to keep the Oregon SALT workaround alive and well. 

Senate Bill 1510 (“SB 1510”) was introduced in the Oregon Senate on February 24 (hours after I put my pencil down from writing the last blog article and awaiting its publication).  The bill has been passed by the Senate and is currently waiting to be voted on by members of the House of Representatives.    

Unlike Senate Bill 211 (“SB 211”), which was introduced in the Oregon legislature during the 2025 session, SB 1510 is not a standalone bill solely focusing on extending the life of the Oregon SALT workaround.   Rather, a provision to extend the SALT workaround is sandwiched between three other provisions, namely a provision extending a property tax exemption for cargo containers, the repeal of a tribal tax exemption and a requirement that the board of tax practitioners register enrolled agents.

Background

Prior to the Tax Cuts and Jobs Act (“TCJA”), there was no direct limitation on an individual taxpayer’s deduction of his or her state and local taxes (“SALT”) on the federal individual income tax return.  Of course, for high-income taxpayers, the SALT deduction often triggered the alternative minimum tax.

The TCJA

As of 2018, the TCJA capped the SALT deduction for individuals at $10,000 per year for both single and married taxpayers filing jointly ($5,000 for married taxpayers filing separately).  Hence, the SALT cap contains an inherent “marriage penalty.” 

The OBBBA

The SALT cap, which was part of a compromise among lawmakers for an increase in the standard deduction under the TCJA, was scheduled to sunset at the end of 2025.  However, as previously reported, the One Big Beautiful Bill Act (“OBBBA”) amended and extended the SALT cap. 

The following are the key elements of the SALT cap, as extended under the OBBBA: 

1. The OBBBA amendment to the SALT cap applies to taxable years beginning after 2024.
2. The cap is now $40,000 ($20,000 in the case of a married taxpayer filing separately).  It increases by 1% each year but reverts to $10,000 ($5,000 in the case of a married taxpayer filing separately) in 2030.  The cap, as reduced in 2030 to $10,000 ($5,000 in the case of a married taxpayer filing separately), does not appear to sunset.  So, it becomes a so-called permanent provision of the Internal Revenue Code.  
3. Under the OBBBA, the cap is reduced by 30% of a taxpayer’s modified adjusted gross income to the extent it exceeds the threshold amount ($500,000 for married taxpayers filing jointly and single taxpayers, and $250,000 in the case of a married taxpayer filing separately).  However, the SALT cap cannot be reduced below $10,000 ($5,000 in the case of a married taxpayer filing separately).

After the SALT cap was introduced as part of the TCJA, the Internal Revenue Service announced in IRS Notice 2020-75, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through and are paid by the ultimate owners of the entity), the entity will not be subject to the $10,000 SALT cap.  As a consequence, many state legislatures passed so-called SALT cap workarounds for pass-through entities.  Oregon was among those states.

Oregon House Bill 3115 (“HB 3115”) was sponsored by Representatives John Lively (D) and Kimberly Wallan (R).  It was co-sponsored by Representatives Tom Anderson (D), David Gomberg (D) and Nathan Sosa (D). 

HB 3115 was introduced in the Oregon House of Representatives (“House”) on January 13, 2025. It passed the House on March 17, 2025.  The legislation was introduced in the Oregon Senate (“Senate”) on March 18, 2025.  It passed in the Senate on April 29, 2025.  The bill was signed by the Speaker of the House and the President of the Senate on May 1, 2025.  Governor Kotek signed HB 3115 on May 8, 2025.  The bill becomes law 91 days following adjournment sine die (i.e., the final adjournment of the legislative session).

With the Corporate Transparency Act hopefully in our rearview mirrors, I decided to take a brief break from my ongoing series on Subchapter S and report on a different topic. In the last few weeks, the Magistrate Division of the Oregon Tax Court issued two important decisions,[i] both of which center on a singular issue – whether the taxpayer had engaged in an activity for profit and was thus able to deduct its losses under IRC Section 162.  These battles, commonly referred to as “hobby-loss” cases, have existed among the Internal Revenue Service and/or the state departments of revenue, and taxpayers for decades.  I suspect, with the anticipated significant reduction in staffing at the Internal Revenue Service, we will see more audit activity at the state level throughout the United States.  Among the audit activity may be hobby-loss cases.

In Oregon, the department of revenue (the “ODOR”) has recently made the hobby-loss issue a mainstay in its audits of activities where losses result.  I suspect it is not earth shattering that activities such as horse breeding, racing and training; wineries and vineyards; automobile racing; airplane rentals; and llama breeding and sales have been under fire by the ODOR as hobbies rather than activities engaged in for profit.  Interestingly, the ODOR appears to have added other activities to the list, expanding its hobby-loss exams to include traditional farming and other related activities.

On August 23, 2022, the Regular Division of the Oregon Tax Court issued its opinion in Santa Fe Natural Tobacco Co. v. Department of Revenue, State of Oregon.  The court determined that the taxpayer in that case is subject to the corporate excise tax. 

The taxpayer, Santa Fe Natural Tobacco Co., required that its wholesale customers located in Oregon accept and process returned goods.  In addition, the taxpayer’s in-state sales representatives, who did not maintain inventory, routinely confirmed and processed purchase orders between Oregon retailers and wholesalers.

The Oregon Legislature, in House Bill 3373, created the Office of the Taxpayer Advocate within the Oregon Department of Revenue.  The new law became effective on September 25, 2021.  According to the Oregon Department of Revenue website, the office is open and “here to help.”

The mission of the Office of the Taxpayer Advocate is threefold:

1. To assist taxpayers in obtaining “easily understandable” information about tax matters, department policies and procedures, including audits, collections and appeals;
2. To answer questions of taxpayers or their tax professionals about preparing and filing returns; and
3. To assist taxpayers and their tax professionals in locating documents filed with the department or payments made to the department.

Last fall, the IRS announced, with respect to pass-through entities (LLCs or other entities taxed as partnerships or S corporations), that, if state law allows or requires the entity itself to pay state and local taxes (which normally pass through and are paid by the ultimate owners of the entity), the entity will not be subject to the $10,000 state and local taxes deductibility cap (the “SALT Cap”). 

On February 4, 2021, Senate Bill 727 (“SB 727”) was introduced in the Oregon Legislature.  SB 727 is Oregon’s response to the IRS announcement (see discussion below).

On June 17, 2021, after some amendments, SB 727 was passed by the Senate and referred to the House.  Nine days later, the House passed the legislation without changes.  On June 19, 2021, Oregon Governor Kate Brown signed SB 727 into law, effective September 25, 2021.  In general, it applies to tax years beginning on or after January 1, 2022.  Interestingly, SB 727 sunsets at the end of 2023.

In relevant part, SB 727 allows pass-through entities to make an annual election to pay Oregon state and local taxes at the entity level.  For pass-through entities that make the election, their owners will potentially be able to deduct more than $10,000 of Oregon state and local taxes on the federal income tax return.  However, it gets even better—SB 727 includes a refundable credit feature that may result in further tax savings for some owners of pass-through entities.