Making Money and Paying the Corporate Minimum Tax
Chuck Sheketoff
If you ask a corporation, “Did you make money last year?” its response may well be, “Who’s asking?”
It’s no secret that corporations keep two sets of books, one for shareholders and one for tax authorities. Those books employ different definitions of what it means to make money, which explains why in the same year corporations can report profits to shareholders and have no taxable income on their tax returns.
It also explains why some financially healthy, profitable C-corporations doing business in Oregon end up paying the corporate minimum tax.
That’s not what you’ll hear from some of the opponents of Measure 67 on the January ballot. That measure would raise Oregon’s corporate minimum tax, which has been stuck at $10 for over 75 years.
Consider, for example, the statement by Associated Oregon Industries lobbyist J.L. Wilson at a recent legislative committee hearing on the ballot language. He said that the ballots should include the statement that “companies that pay the corporate minimum tax do so because they have no income.”
But that’s wrong.
Some C-corporations paying the $10 minimum have income, though they may or may not have “taxable income.”
What is “taxable income?” It’s the term used by the IRS to define the income left after a company subtracts business expenses and other deductions under tax code accounting rules, not general accounting rules — “profits for tax purposes,” in plain English.
Acts by the legislature can change a company’s “taxable income,” even if real-world profits remain the same. For instance, Oregon stopped looking at the extent of payroll and property that multistate corporations have in Oregon to apportion the share of their total U.S. profits that Oregon can tax. Large manufacturers with people and property here saw their Oregon “taxable income” — and thus their Oregon tax liability — drop significantly, with no impact on the pre-tax profits the corporations reported to shareholders. Corporate profits for tax purposes in Oregon went down, not real profits.
So how do so many profitable C-corporations end up paying the $10 minimum tax? Some of them use tax subsidies — credits — to reduce their tax liability to zero.
But the vast majority of profitable C-corporations that have paid only the minimum tax rely on the tax code accounting rule known as “loss carry forward,” which allows corporations to apply losses from prior years to the current year to reduce their Oregon taxable income — their profits for tax purposes — to zero or less. In other words, these companies made money in the tax year, but paid just $10 in income taxes because at some point in the not-too-distant past they lost money and are allowed to subtract those earlier losses to make their current real profits disappear for tax liability purposes.
Finally, a few C-corporations use a combination of tax credits and the loss carry-forward rule to get to the $10 minimum.
And it’s not necessarily C-corporations with only a few hundred or a few thousand dollars of profits that manage to reduce their taxable income to zero or less on corporate tax returns. Indeed, among those that paid only the $10 minimum tax in 2006 were 31 C-corporations with taxable income of $1 million or more.
Whether or not one thinks that Oregon has gone too far in handing out tax subsidies (there’s good reason to think so), whether or not one thinks that the loss carry-forward rule is a good one (there are valid justifications for it), and whether or not Oregon should ignore a C-corporation’s Oregon property and payroll when apportioning taxable income to Oregon (there’s no good argument for that scheme), the fact remains that a significant number of profitable C-corporations are paying only the $10 minimum corporate income tax.
Measure 67 would not end the system that allows C-corporations to keep two sets of books. It would not stop tax subsidies nor prevent profitable C-corporations from paying just a minimum tax because their profits for tax purposes in Oregon are so low.
The measure would, however, put an end to the $10 corporate minimum tax that two out of three C-corporations have been paying.
So come January, when Oregonians vote “yes” on Measure 67, they will be saying, “Yes, all C-corporations should pay more than just $10.”
Chuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org
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Nov 1, '09
"It's no secret", eh?
This is just Marxist drivel that paints any company as corrupt...perpetuating the dogma that if any organization more complex than a carrot-farming commune makes any money, they have done so by subterfuge, exploitation and thievery.
Chuck, you have made a pretty good living by sticking your hand in the pockets of others...and trying to fan the flame of class warfare and incite others to do the same. You should be ashamed. Moreso, your parents should be ashamed they raised you with such an entitlement work ethic.
Nov 1, '09
"It’s no secret that corporations keep two sets of books, one for shareholders and one for tax authorities."
Gee, that'd be like saying that the State keeps two sets of books, one that the taxpayers see and one on how the money is actually spent - Uh, poor example.
Nov 1, '09
Just curious Chuck, How much does OCPP pay in income taxes to the state? How much will your taxes go up?
Nov 1, '09
Chuck, Thanks for this excellent explanation of small business tax complications. My late brother started and ran his own small business for 30 years (with about 22 employees plus family members), and your description, including the two sets of books, for example, squares with what I heard about from him. I can't believe that he would ever have have engaged in the whining we are hearing at Blue Oregon about businesses paying their fair share of state taxes.
And by the way, this is supposed to be a place where progressives can talk among ourselves "around the watercooler." Why is there so much wingnut noise here? It's takin' up all the bandwidth. For starters, shouldn't we all agree to use our real names?
1:05 p.m.
Nov 1, '09
Patrick,
Thanks. I am looking forward to Kari's update that gets rid of these anonymous folks with silly "noise" comments.
Me, as soon as my son and his friend are done with lunch we're going to go enjoy the outdoors again on this beautiful day. I'll leave mp97303, Dan and Steve to their caves.
Chuck
Nov 1, '09
Dissenting opinion = "silly noise."
It's a Brave New World, isn't it? Enjoy it while you have it, my Marxist comrades. Sooner or later, you will run out of other people's money.
Fiddle away, grasshopper. Fiddle away.
Nov 1, '09
"silly "noise" comments."
Code for anyone who disagrees with Mr Sheketoff? You might want to read the cover of the Sunday O on green fuels or ask Sam about how he accounted for the Tram.
YOU know if Ted or the legislature could show that this new tax might go for something useful besides shoring up benefit plans, it just might have a choice.
YOu might want to think about this next time someone tries to sell a tax increase.
2:05 p.m.
Nov 1, '09
I worked with Harry Esteve on the story in today's Oregonian...and have been a vocal critic of the program. As noted on OCPP's Facebook page today's story ought to be the impetus for turning the tax expenditure program into a direct budget subsidy program where the costs can be controlled.
2:37 p.m.
Nov 1, '09
Yup, Steve, you oughta Google "sheketoff betc" and you'll find all the stuff he's written - including here at BlueOregon - about how that program has morphed from worthwhile subsidy to overblown boondoggle.
2:38 p.m.
Nov 1, '09
Dan, Steve, and MP -- If you want to be taken seriously, address Chuck's post on the merits and use your real name. It's possible to disagree without being disagreeable. (See the regular comments from Jack Roberts.)
2:50 p.m.
Nov 1, '09
Now that comment looks like a thread killer Kari......
Nov 1, '09
Kari
You know what strikes me as odd, I get the same line from you about posting with my real name anytime I happen to be disagreeing with the liberally mandated POV. However, when I support single payer/public option healthcare, gay rights or criticize teabagging fools, no one seems to care what my real identity is.
Curious.
3:04 p.m.
Nov 1, '09
It's possible to disagree without being disagreeable. (See the regular comments from Jack Roberts.)
Hey! Wait a minute! I can still be disagreeable while using my real name.
6:26 p.m.
Nov 1, '09
You know what strikes me as odd, I get the same line from you about posting with my real name anytime I happen to be disagreeing with the liberally mandated POV. However, when I support single payer/public option healthcare, gay rights or criticize teabagging fools, no one seems to care what my real identity is.
That's really what you got out of this, eh?
I think you're capable of more if you actually try.
Nov 1, '09
Heck, even the Statesman Journal has reservations about this. here
Nov 1, '09
I'll give you an example of two sets of books or more properly, two mental takes: When someone has an obligation to pay child support, he or she immediately downplays potential income and ability to pay. Employer is not giving overtime, it may cut the force, obligor is getting sick and stressed so can't work the longer hours if they were available, etc... That is why in discovery the parties are routinely asked for all financial statements they have given to get credit within a certain period of time.
7:01 p.m.
Nov 1, '09
While I'd love to know the anonymous names Jack Roberts has used, and do hope Kari will set up a system soon that keeps the anonymous people off this blog, let's get this back to the issue: profitable C-corporations -- C-corporations making money -- get away paying the minimum tax. Don't let people tell you otherwise.
Nov 1, '09
Posted by: Theresa Kohlhoff | Nov 1, 2009 6:56:49 PM---once I had a coworker who was working 2 jobs, sometimes 6 or 7 days a weekl struggling to get child support. But her ex would quit jobs so he didn't have to pay child support. Finally, a sheriff paid a call on him and eventually he paid up--by the time she was looking at paying for college. Back child support helped in that respect.
If companies truly were struggling, they wouldn't have had the money to contribute huge sums to get these measures on the ballot.
Nov 1, '09
Let me see if I have got this right: 5156 Oregon C Corp's used what the IRS and ODOR allow them to use to wipe out their current years taxable income. This concerns you enough that you want to punish the other 15,647 Oregon C Corp's who legitimately had "Zero income or loss in current year" or "Minimal income in current year" as defined by ODOR, by raising their taxes. (Not to mention the other 12,327 C Corp's that are currently paying more than the minimum.)
Do I have that right Chuck?
Nov 1, '09
"If you want to be taken seriously, address Chuck's post on the merits"
OK, here's what the average Oregon taxpayer has seen: -2004-2006 Education budget goes up 20%, mostly for benefits 2007 - Tobacco settlement of approx. $600M received. For cancer patients, maybe 0.01% goes to cancer patients rest vanishes into general fund. 2009 - Receive clsoe to $1B in fed stimulus money 3000 2-week jobs created, rest vanishes.
Lesgislature then tells us we need new taxes so we can have better schools. C'mom, the average voter is smarther that Teddy K and doesn't buy his for a minute.
If this tax passes, we'll be held hostage again for schools. Sometimes the real progressive thing to do is let a spendthrift govt see where their path is leading them sooner.
Nov 1, '09
hey mr sheketoff why dont you and all your liberal posting pals on this blue oregon site include all the hidden taxes oregon businesses pay like fees,system development charges and etc in your businesses only pay the 10.00 corporate minimum argument?businesses pay a heck of a lot more than the 10.00 minimum.what are you liberals so scared and afraid of?start mentioning the real truth chuck on how much in taxes,fees and etc that businesses really actually pay and enough of this they only pay the 10.00 corporate minimum baloney too.
Nov 1, '09
Kari, luckily this IS a blog and you do not have to behave impartially.
Nov 1, '09
The C Corps were able to use tax credits to eliminate the payment of $60M. Do we know how much in taxes those 4770 C Corps were able to avoid paying by employing the Operating Loss Carry Forward?
12:11 a.m.
Nov 2, '09
-2004-2006 Education budget goes up 20%, mostly for benefits
Steve Marx - So, are you supporting the national health care reform effort, which will serve to bend the curve on health care costs? Our school funding problem is a health care inflation problem.
(Please note, folks, that Steve Marx is not Steve Marks.)
Nov 2, '09
Chuck, I support the tax. But I think you and the crowd of Blue Oregon second-rate intellects might be missing the real problem for this tax. The Democratic leadership in our state has zero character integrity and credibility at this point. They live in a bubble of arrogant and frankly values-impoverished Portland metro "creative-class" types and Salem lobbyists who don't have true respect for poor and working people.
This story is just the tip of the iceberg because what it says about the lack of simple integrity amongst that leadership crowd (and this was while Merkley was House Speaker, by the way):
State lowballed cost of green tax breaks
Rep. Phil Barnhart of Eugene, who was chairman of the House Revenue Committee in 2007, said he and his fellow Democrats were skeptical about handing out more tax breaks to businesses when other needs were going unmet. But they wanted to encourage what he calls the "green revolution" and Kulongoski's goal of providing jobs while boosting the state's energy independence.
As a Democrat who does believe we need these tax increases and a much more progressive tax system than we have, I at the same time cannot argue for it with a clear conscience because of the genuine crisis of political integrity in the elected leadership that you and Blue Oregon and all the selfish, arrogant, actually pretty stupid, activist base has brought to power and remains behind. Just because the Republicans in the state are worse in many, if not most, respects is not a valid argument in response.
Nov 2, '09
Off topic, but do the feds have a miniumum corporate tax for C Corps that show -0- taxable income? I don't recall seeing that but I am no expert on corporate taxes. Assuming the feds don't have a minimum tax, wondering about the justification for Oregon having one? Why not just raise the Corporation annual license fee by a hundred bucks or two hundred bucks or whatever and not call it a minimum tax? The idea of having a tax rate applied to -0- taxable income (X times 0 = ??) is a bit of a brain twister. Whatever.
Nov 2, '09
Kari,
"...the national health care reform effort, which will serve to bend the curve on health care costs? Our school funding problem is a health care inflation problem."
Even the CBO says the long term effect of the current health care plans in Congress will increase health care costs to the tune of $1 Trillion over 10 years. I think you are both changing the subject and assuming facts not in evidence.
Is the school funding issue just about health care? I thought retirement benefit costs were the real cost issue.
Is there any waste in the system we could attack before we increase taxes? Where are the pressures to save tax dollars and spend them wisely?
Nov 2, '09
@ Greg D.: There is NO Federal minimum tax for corporations just like there is NO Federal minimum tax for individuals.
Sixteen states have a flat minimum corporate tax ranging from $10 in Louisiana to $800 in California; New York has a graduated tax that maxes out at $5,000. If Oregon's passes, that $100,000 max will be totally out of line with the rest of the country.
Nov 2, '09
If Oregon's passes, that $100,000 max will be totally out of line with the rest of the country.
Well, there's Washington, which has a gross receipts tax that's about half a percent (about five times Oregon's new minimum) that isn't capped at all. So, it's much, much higher. Like, infinitely higher. Plus all those states where businesses pay sales taxes. Those aren't capped depending on revenue levels (and they also apply whether you're making a profit or not), so that's a heckuva lot higher.
Nov 2, '09
Ecto Cooler - Plus all those states where businesses pay sales taxes
What sales taxes do businesses pay? I thought sales taxes were levied at retail. Businesses collect those taxes, but it's the consumer who pays. I wasn't aware that businesses paid sales taxes on raw materials/components for manufacturing, and as far as service businesses, I didn't think they paid on any of the imputs (labor, materials) there either unless they're buying their materials at retail.
I have to admit that the only place I've ever had to deal with sales taxes was when I was selling artwork at a show up in Yakima, Washington. I actually produced the paintings in Oregon, so I didn't have to pay sales taxes on any of the paints, brushes, etc. But I worked with my father on construction projects in Washington state, and I don't remember ever paying sales taxes on mortar, stone, tile, etc..
5:47 p.m.
Nov 2, '09
Bullshit. CBO scoring on the current proposals show no such thing.
Nov 2, '09
Lestatdelc,
My apologies. I did misstate my point.
The CBO scoring shows that our federal government will spend $1 Trilion more than it would without the bill during the 10 year period. "The estimate includes a projected net cost of $894 billion over 10 years for the proposed expansions in insurance coverage. That net cost itself reflects a gross total of $1,055 billion in subsidies provided through the exchanges (and related spending), increased net outlays for Medicaid and the Children’s Health Insurance Program (CHIP), and tax credits for small employers;"
It also claims that much of that is offset by increased taxes, lowered tax credits, etc. That just means more taxes and more programs, $1 Trillion of program cost.
I wouldn't use my name either if I had to result to cursing to make my point in a conversation.
Tom
Nov 2, '09
"What sales taxes do businesses pay? I thought sales taxes were levied at retail. "
When a business buys a new computer in a sales tax state, do they not pay sales tax?
Nov 2, '09
When a business buys a new computer in a sales tax state, do they not pay sales tax?
No, they go online and buy from Dell or CDW. So long as you don't live in a state that either of those companies has a physical presence, you pay no sales tax.
Nov 2, '09
Joanne is correct on the sales tax. A business doesn't pay sales tax on any item for resale or a component of an item for resale. You present your tax exempt certificate at time of purchase to the supplier.
Nov 2, '09
"So, are you supporting the national health care reform effort, which will serve to bend the curve on health care costs? Our school funding problem is a health care inflation problem."
Not a problem, if we really do single-payer. However, base on the public employee uninon's record of give-backs, I really think there is a snow ball's chance of them dropping really good med insur which taxpayer subsidize for average coverage they pay for.
It'd be worth a try, since teh other half of the pronblem is PERS. Over the years, the State has rolled over for whatever the union wanted and now they have a 400 lb gorilla, that no one in the Legislature or Teddy wants to take on.
They'll do patches like a couple of years back, but there will have to be some radical changes, otherwise about every extra penny of taxes will be paying benefits from here on out.
Nov 2, '09
First off, the issue of the corporate minimum tax just keeps going round and round. Whether it wins or not will not depend on the merits of the arguments but on who can hoodwink the public long enough.
As far as controlling discussion on this or any forum...
Chuck Sheketoff wrote: "While I'd love to know the anonymous names Jack Roberts has used, and do hope Kari will set up a system soon that keeps the anonymous people off this blog..."
I'd have more respect for your opinions on the whole, Chuck, if you defended your them instead of complaining about commenters without last names and if you showed that you had an understanding of the basic workings of the internet.
Not you, not the owners of this blog, not the people of this state are going to change the fact that you can remain anonymous on the internet. If you evidence a clearer understanding of technology, the link economy and new media you'll be better positioned to effectively lead a public policy institution.
Cheers, the fake Chuck Sheketoff
Nov 3, '09
I tried to think so, but I found it was not as the same in the actual process. As you mentioned, I still have doubts, but really thank you for sharing!
Nov 3, '09
This is in all state laws in any state with a sales tax?
"Posted by: mp97303 | Nov 2, 2009 7:35:08 PM
Joanne is correct on the sales tax. A business doesn't pay sales tax on any item for resale or a component of an item for resale. You present your tax exempt certificate at time of purchase to the supplier. "
And you know this because....?
Nov 3, '09
LT,
I think states actually vary in how they charge a sales tax. Some charge on retail sales, some on wholesale, or wholesale under certain circumstances (i.e. if you don't have an employer ID number or EIN, etc.), still others charg a sales tax on services in addition to goods. Sales taxes levied on materials that will be resold wholesale or included in other manufactured goods will be added to the sale price of what ever the wholesale purchased material is.
The bottom line is that where wholesale materials are taxed, it's always the end purchaser who ultimately pays for it. That means that if I as a manufacturer have to pay a sales tax on my raw materials, you're going to reimburse me for those when you by my product. So you get to pay both of those sales taxes.
Nov 3, '09
And you know this because....?
I spent 4 years owning multiple businesses in Arizona.
Nov 3, '09
I published an an article at Salem News looking at the facts of Measure 67.
66% of corps in Oregon are local, and they pay 25% of the corp tax revenue. 60% of corps in Oregon make no profit or a loss.
The effects of increases in taxes and fees in Measure 67 fall disproportionately on small and local businesses.
Because the the tax on sales is capped at $100,000 it falls disproportionately on small businesses. Walmart pays $100,000, which may work out to .00001% of their sales, while the corner store pays the exact same tax, which is .01% of their sales. This puts small local businesses at a serious competitive disadvantage with big national retail chains.
<h2>I support tax fairness, but Measure 66 & 67 do not make the tax code more fair. They cripple local businesses and give a competitive advantage to big out-of-state corporations.</h2>