Do Corporations Pay State Taxes: Everything You Need to Know
State business taxes vary from state to state, from 0 in South Dakota and Wyoming to up to 12 percent in Iowa.4 min read
Do corporations pay state taxes? This is a question often asked by business owners. State business taxes vary from state to state, from 0 in South Dakota and Wyoming to up to 12 percent in Iowa. Some states such as Ohio, Texas, and Washington don't impose corporate income tax rates but have a gross receipts tax derived from the company's gross revenues before deductions. Other taxes may include franchise taxes, license fees, or special fees.
Do Corporations Pay State & Federal Taxes?
Corporations are required to pay taxes and the IRS sets a tax rate that depends on the corporation's taxable income, taking into account deductible expenses, exempt income, and tax credits. The business structure and state it's located in affect the tax rate.
For tax purposes, corporations can be either S or C, with S corporations passing on net income to shareholders and C corporations paying taxes on their business net income.
A limited liability company may choose how it wants to be taxed. The IRS allows LLC partners to report their earnings as passive income to avoid paying Medicare and Social Security taxes. If the LLC files as a C Corporation, it pays income taxes at corporate rates.
Companies rely on different methods to lower their taxes or to avoid them altogether, which is why Congress passed a law requiring an alternative minimum tax with a base rate of 20 percent of net income. Corporations must calculate this AMT and regular taxes, and pay the higher amount.
How State Corporate Income Taxes Work
Corporate income is the result of benefiting from public services pay taxes in return for maintenance of those services, just like regular people do. They need to be taxed to make things fair. According to Tax Policy Center, forty-four states and D.C. have imposed corporate taxes.
Why Tax Corporations?
Corporations have the same rights as people and may benefit in similar ways. They pay taxes for their purchases or property, and therefore should also pay for the profits they make, just like people pay state taxes with their income. Despite being treated as individual persons, corporations are several individuals put together, as the Institute on Taxation and Economic Policy puts it.
Attributes of Corporate Income Taxes
Corporate income tax has many attributes:
- It primarily affects the state's most affluent residents
- The tax is exported to other states and even countries since corporations have shareholders around the country
- Most income of wealthy Americans would go untaxed without the corporate tax, since they would treat personal income as being corporate
Steps For Calculating State Corporate Income Tax
State tax for corporations is calculated based on these issues:
1. Whether the company needs to be taxed: The company must determine its engagement in the state as determined by Public Law 86-272. Companies are exempt from state taxes if their only activity in the state is solicitation of order or shipment of goods to that state.
2. Profit: Taxable companies measure their profit by calculating their annual net income using the federal corporate income tax to get an estimate.
3. Determining business income: A company's taxable income can be divided into business income and non-business income in order to tax the profits made from daily operations.
4. Apportionment: Each state has its share of corporate business income and is not allowed to tax all of a company's profits to avoid multiple taxation.
5. Calculating tax: Once the share of taxable income is determined in a given state, the tax amount is calculated by multiplying that number by the state's corporate tax rates.
6. Credit subtraction: Companies may be allowed to subtract targeted tax credits if a state allows it, from the pre-credit tax liability.
7. Minimum payment: Even unprofitable corporations are required by most states to pay a minimal income tax depending on the company's net worth.
State tax should include corporate income tax to ensure corporations are paying fair amounts. Therefore, corporate tax is a vital component of state tax.
Other Taxes Your Business Must Pay
Other taxes you must remember to pay include:
- Sales tax on products and services sold in other states
- Property tax from business properties
- Excise taxes for use and consumption
- Self-employment taxes based on owner's share of business income
- Employment taxes based on employee earnings
- Franchise taxes
What Income is Taxed?
Most states start with the federal definition of corporate income to calculate tax. However, since most corporations are located in multiple states, each state must determine what portion of that company's income is taxable in their state.
How Much Do Corporate Income Tax Rates Differ Across States?
In 2016, corporate income tax rates were between 4 percent in Kansas and North Carolina and 12 percent in Iowa. Just five states and D.C. had rates above 9 percent. Nevada, South Dakota, Washington, and Wyoming didn't have any corporate income taxes, while Ohio and Texas taxed corporate gross receipts instead of income.
If you need help with State Taxes for Corporations, you can post your legal need (or post your job) on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.