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. 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.
Currently, four states, Nevada, South Dakota, Washington, and Wyoming, do not have a corporate income tax, and the same four states, along with Alaska, Florida, and Texas, have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.
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.
Florida is like most states in that it has a corporate income tax, but unlike many states in that it does not have any franchise or privilege tax generally applicable to businesses. Moreover, as mentioned above, Florida does not have a personal income tax. Thus, for the most part, unless your business is a traditional corporation (a C corporation), neither your business’s income nor its net worth will be subject to state taxation. More particularly, and unlike those many other states that have personal income tax, if income from your business passes through to you personally, that income will not be subject to taxation on your personal state tax return. Thus, in terms of taxes, it can be advantageous to form your business as an S corporation, LLC, partnership, or sole proprietorship rather than a corporation.
Florida corporate income is taxed using one of two methods: a 5.5% state tax on federal taxable income or a 3.3% alternative minimum tax (AMT) based on the federal AMT rules. (The 3.3% tax under the AMT method applies after taking into account the amount of any federal exemption or reduced exemption as stated on the corporation’s federal tax return.) A Florida corporation is required to use whichever method results in the higher tax for the corporation. Regardless of which method applies in a given case, $25,000 of net income is exempt for the 2012 calendar year, and $50,000 of income is exempt starting January 1, 2013.
Payment of the corporation net income tax is due on April 1st if the corporation’s tax year is the same as the calendar year. Otherwise, the return is due on 1st day of the fourth month after the close of the corporation’s tax year.
Florida also has special rules for certain LLCs. If a corporation is a member of a multi-member LLC classified as a partnership for federal and state tax purposes, the LLC must file Florida Form F-1065 and the corporation must file a Florida corporate income tax return. Similarly, if a corporation directly or indirectly owns a single member LLC classified as a disregarded entity for federal tax purposes, the corporation must file Florida Form F-1120 reporting both its own income and the income of the single member LLC.
Let’s briefly look at additional details for five of the most common forms of Florida business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Florida corporations are subject to Florida’s corporate income tax. There are two different methods to compute this tax, and the corporation is required to use whichever method results in the higher tax. For 2012, the first $25,000 of income is exempt. Starting January 1, 2013, the first $50,000 of income is exempt.
Example: For the 2012 tax year, your corporation had income of $525,000. Other things being equal, the first $25,000 will be exempt, leaving $500,000 in income taxable by the state. Assuming that the 5.5% tax rate results in more tax due than the 3.3% alternative minimum tax, the corporation will owe Florida corporate income tax in the amount of $27,500 (5.5% of $500,000).
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 is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and 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 be actually distributed to the shareholder in order for the shareholder to owe tax on that amount.) Florida recognizes the federal S election, and Florida S corporations are not required to pay income tax to the state. In addition, because Florida has no personal income tax, S corporation shareholders also are not required to pay tax on their income from the S corporation.
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 federal tax returns; however, you will owe no tax on this money on your Florida tax returns.
Limited Liability Companies (LLCs). Standard LLCs are usually pass-through entities that are not required to pay income tax to either the federal government or the State of Florida. Instead, income from the business is distributed to individual LLC members, who then pay federal taxes on the amount distributed to them. Because Florida has no personal income tax, typical Florida LLC members are not required to pay tax to the state on their income from the LLC.
As discussed above, multi-member LLCs classified as partnerships for tax purposes that have a corporation as a member, and single-member LLCs classified as disregarded entities that are directly or indirectly owned by a corporation, are subject to special state filing requirements.
Also, while by default LLCs are classified for tax purposes as either partnerships or disregarded entities, it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would be subject to Florida’s corporate income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, and no members that are corporations, 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 respective portions on your respective federal tax returns. You will owe no tax on this money on your Florida tax returns.
Partnerships. Income from partnerships is distributed to the individual partners, who then pay federal tax on the amount distributed to them. Because Florida has no personal income tax, partners are not required to pay tax to the state on their income from the partnership.
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 federal tax returns. You will owe no tax on this money on your Florida tax returns.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay federal tax on that income. Because Florida has no personal income tax, you are not required to pay tax to the state on your income from the sole proprietorship.
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 federal tax return. You will owe no tax on this money on your Florida tax return.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Florida. If you’re doing business in several states, 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 Florida, it may be subject to Florida 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 Florida’s corporation net 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 Federick Daily (Nolo).