Oregon House Bill 2164, which was signed into law on July 23, 2019, makes certain technical corrections to the new Corporate Activity Tax (CAT) law that is effective for tax years beginning on or after January 1, 2020. One key change for the construction industry is that the bill adopts an exclusion from taxable commercial activity for subcontracting payments for labor costs that are made by a general contractor to a subcontractor pursuant to a contract for residential real estate construction. The exclusion (1) is allowed only for single-family residential construction located in Oregon; (2) does not apply to payments for materials, land or permits; (3) is not allowed for payments between subcontractors; and (4) “shall be 15 percent of payments for labor by the general contractor.” In addition, the bill revises the definition of “costs inputs” to refer simply to the cost of goods sold as calculated in arriving at federal taxable income. Previously, the definition of cost inputs was defined with reference to the cost of goods sold as calculated under IRC section 471. The technical corrections bill also adopts certain new exclusions from commercial activity, including, but not limited to, an exclusion for certain receipts from hedging transactions and for certain types of compensation. Previously, interest income was not included in the scope of commercial activity, except for interest from credit sales. House Bill 2164 would expand the exception so that interest income, including service charges, received by a financial institution is included in the CAT base. Another change is that the bill clarifies that any person with commercial activity of less than $750,000 (previously $1 million) is an excluded person that is not subject to the CAT (unless it is a member of a unitary group that has commercial activity in excess of $750,000). Although tax exempt entities are generally “excluded persons,” if a tax-exempt entity has unrelated business income taxable under the IRC, it will be considered a CAT taxpayer. Finally, the bill adopts a catch-all sourcing provision for financial institutions and insurers. In the case of a financial institution or an insurer, commercial activity not otherwise described in the statute will be sourced to Oregon if it is from business conducted in the state. Please stay tuned to TWIST for future CAT updates.
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