Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form. More particularly, in most states corporations are subject to a corporate income tax, while income from “pass-through entities” such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which more often are flat regardless of the amount of income, generally range from 4% to 9%, and personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.
A few states have no corporate income tax, and a few other states have no personal income tax.
Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a “franchise tax” or “privilege tax.” This is frequently defined as a tax simply for the right or “privilege” of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.
Colorado has a corporate income tax as well as an alternative tax on gross receipts. However, unlike many states, Colorado does not have any franchise or privilege tax generally applicable to businesses. Thus, for the most part, unless your business is a traditional corporation (a C corporation), the business itself will owe no state tax on its income or its net worth. However, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Colorado taxes the net income of corporations at a flat rate of 4.63%. This is the same as the state’s tax rate on personal income (not counting the alternative minimum tax that also plays a role in the state’s personal income tax). State tax returns are due on the 15th day of the fourth month after the close of the tax year. For companies whose tax year corresponds with the calendar year, this means returns are due on April 15th.
For certain taxpayers, Colorado offers a gross receipts tax as an alternative to the income tax. In order to qualify:
Let’s briefly look at additional details for five of the most common forms of Colorado business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Colorado corporations are subject to Colorado’s corporate income tax at a rate of 4.63%. (Certain corporations may qualify for the alternative tax on gross receipts.)
Example: For the latest tax year, your Colorado corporation had a taxable income of $100,000. Other things being equal, the corporation will owe Colorado corporate income tax in the amount of $4,630 (4.63% of $100,000).
S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect “S” status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, each individual shareholder is subject to federal tax on his or her share of the corporation’s income. In other words, S corporations are “pass-through” entities. (Note that a shareholder’s share of the S corporation’s income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Colorado recognizes the federal S election, and Colorado S corporations are not required to pay tax to the state. However, individual S corporation shareholders will owe tax on their share of the corporation’s income.
Example: For the latest tax year, your S corporation had net income of $100,000. The $100,000 in net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Colorado. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.
Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, “disregarded entities”), it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would also be subject to Colorado’s corporate income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow LLC members, and you will each pay tax on your own portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).
Partnerships. Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns.
Example: For the latest tax year, your partnership had net income of $100,000. The $100,000 in net income will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective state tax returns, at a rate of 4.63% (plus any applicable alternative minimum tax).
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Example: For the latest tax year, your sole proprietorship had net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return, at a rate of 4.63% (plus any applicable alternative minimum tax).
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Colorado. However, if you’re doing business in several states, you should be aware that your business may be considered to have “nexus” with those states, and therefore may be obligated to pay taxes in those states. Also, if your business was formed or is located in another state, but generates income in Colorado, it may be subject to Colorado taxes. The rules for taxation of multistate businesses, including what constitutes nexus with a state for the purpose of various taxes, are complicated. If you run such a business, you should consult with a tax professional.
For further guidance on Colorado’s corporation income tax, check the Department of Revenue website. For information on business-related taxes in other states, check Nolo’s 50-State Guide to Business Income Tax. And, if you’re looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business, by Frederick Daily (Nolo).