Larry's Tax Law

As reported on May 13, 2025, several changes to the Washington state tax laws were passed by lawmakers and delivered to the desk of Governor Ferguson in late April, awaiting his signature to make them law.  In the aggregate, these changes create what is likely the largest historical increase in taxes the state has ever seen.  While there was some speculation that the governor would not sign all of the bills into law, especially since they had been sitting on his desk for more than three weeks, that speculation is no longer.  Governor Ferguson signed these bills into law on May 20, 2025.

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).

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.

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

The SALT cap was added to the TCJA, in part, as a compromise for an increase in the standard deduction (almost doubling it from pre-TCJA days). It is, however, set to sunset at the end of this year.

Many individuals, wanting to liberate their wallets from taxes, have moved to states like Washington, Nevada, Texas, Florida and other states that have friendly state and local tax regimes.  This trend, especially for residents of high-tax states such as New York, Oregon and California, has increased in recent years. 

Until 2022, Washington had been a top choice for many individuals seeking a better tax climate. Effective January 1, 2022, however, Washington lawmakers adopted a capital gains tax, causing several residents to look for residency outside of Washington, including billionaire Jeff Bezos who moved to Florida.  Additionally, effective January 1, 2022, the city of Seattle adopted a new payroll tax on certain businesses with payrolls of $7 million or more.  On top of that, effective January 1, 2025, the city of Seattle upped the ante, adopting an additional payroll tax of 5% on businesses with high-earning employees (5% of annual compensation paid to any employee in excess of $1 million who is based at a business location within the city). 

Rather than let the seas calm, Washington lawmakers are once again changing the tax terrain in the state.  Several tax bills have been passed by the legislature and are on Governor Ferguson’s desk waiting to be signed into law.  Whether these bills will become law is yet to be seen.

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.

Now that the scurrying around and worrying relative to developments impacting the Corporate Transparency Act (“CTA”) that were coming at us with laser speed are on a slow simmer, I can turn my attention back to my multi-part series on Subchapter S.  Don’t worry, I am not abandoning my coverage of the CTA.  I intend to report any future developments, earth-shattering or otherwise.  

INTRODUCTION

At the most fundamental level, corporations with an election in effect under Code Section 1362 are flowthrough entities.  Items of income, loss, deduction and credit pass through to the shareholders under Code Section 1366 on a pro-rata basis.  Likewise, all operating and liquidating distributions must be made to the shareholders in strict proportion to share ownership.  Unlike Subchapter K, which allows in certain circumstances special allocations of the pass-through items and disproportionate distributions, Subchapter S is not so forgiving. 

These concepts seem mundane.  Unfortunately, in practice, they can sometimes create havoc for the unwary.

In this Part XVI of my multi-part series on some of the not-so-obvious aspects of Subchapter S, I explore how the flowthrough of items of income, loss, deduction and credit are impacted when there are changes in the ownership of an S corporation during the taxable year.

It was about 5:30 p.m. PT last Friday, March 21, 2025, and I was about to sign off from my computer after a long week and turn my attention to college basketball, when I received an email from FinCEN.  The message was that FinCEN had issued an interim final rule relative to the Corporate Transparency Act (“CTA”). 

I am embarrassed to admit that my curiosity got the best of me.  Rather than jump into a weekend of exciting college basketball, I chose to read the 36-page interim final rule (the “IFR”).  Yes, I am a bit consumed with the saga of the CTA.  However, thanks to my cable provider, my DVR had been busy all day recording the games.  So, after scouring the IFR, I was able to enjoy a late night of college hoops.

I was hoping to take a short breather from covering the Corporate Transparency Act (“CTA”). However, I am getting several inquiries from attorneys and business owners, asking if they have missed anything with respect to the CTA and more specifically whether the CTA is dead or alive.  Accordingly, I decided to provide readers with a brief update. 

I apologize in advance if this report creates stress or anxiety.  Unfortunately, this entire ordeal has created unrest for business owners and their advisers.  We continue to hope that the saga will come to an end.

If you feel punch-drunk from the rapid-fire updates to the Corporate Transparency Act (“CTA”), you are not alone.  It is hard to keep up with the madness surrounding this law.

Hoping not to stupefy readers, I will address what I believe is the latest major development in the life of the CTA.  The Treasury made an earth-shattering announcement this past Sunday that can be broken down into the following two bite-size components:

On Thursday, February 27, 2025, FinCEN announced that it will not issue any penalties or pursue enforcement action against reporting companies for the mere failure to meet the current filing deadlines. That news for many is like the title to British songwriter and singer Zoë’s hit song Sunshine on a Rainy Day!

Be aware, this reprieve only lasts until FinCEN issues its interim final rules and they become effective. These rules are expected to be issued on or before March 21, 2025.  Consequently, for those reporting companies that have not registered yet, they need to keep a keen eye on the ball. Alternatively, those companies may want to consider filing before the extended deadline to avoid a foot fault.