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.
Idaho has a corporate income tax, as well as certain special taxes applicable to S corporations and LLCs. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal Idaho tax return.
Idaho taxes corporate income at a flat rate of 7.4%. There is also a minimum corporation tax of $20, and a $10 excise charged when a return is filed. (By comparison, Idaho personal income tax rates range from 1.6% to 7.4% depending on income, plus a $10 excise tax for filing a return.)
S corporations are required to pay a minimum tax of $20. An additional tax of at least $10 is required if the S corporation owes federal tax on excess net passive income or net recognized built-in gains. Undistributed LLC income is taxed at the corporate income tax rate. Also, if all LLC income or loss is not distributed and is not otherwise reportable and the LLC has no taxable income from Idaho, an additional $10 tax is required.
Idaho also allows taxpayers who own no property in Idaho, have no payroll in Idaho, and whose gross sales in the state do not exceed $100,000 to pay an alternative tax of 1% of gross sales. however, this option is not likely to apply to most Idaho businesses.
Let’s briefly look at additional details for five of the most common forms of Idaho business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Idaho corporations are subject to Idaho’s corporate income tax at a flat rate of 7.4% and a $10 excise tax when filing a return.
Example: For the latest tax year, your Idaho corporation had a taxable income of $200,000. The corporation will owe Idaho corporate income tax in the amount of $14,800 (7.4% of $200,000). The corporation will also owe $10 excise tax when filing its return.
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, 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 actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Idaho recognizes the federal S election, and Idaho S corporations are not required to pay corporate income tax to the state. However, Idaho S corporations are required to pay a $20 minimum tax, and a possible additional tax of at least $10 under certain circumstances (see above). Also, an individual S corporation shareholder will owe tax on his or her share of the company’s income.
Example: For the latest tax year, your S corporation had net income of $200,000, all of which was distributed to the shareholders. Also, your business owed no federal tax on excess net passive income or net recognized built-in gains. Your S corporation will owe the state a $20 minimum tax. Each of the shareholders will pay tax on his or her individual state tax return on his or her portion of the $200,000 in net income. The rate each shareholder pays will vary depending on his or her overall taxable income for the year.
Limited Liability Companies (LLCs). Like S corporations, standard LLCs are pass-through entities and, generally speaking, are not required to pay income tax to either the federal government or the State of Idaho. Instead, income from the business usually is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them. However, Idaho is unusual in that it requires LLCs to pay corporate income tax on nondistributed income, and an additional $10 tax under certain circumstances (see above).
Also, 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 Idaho’s corporation income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $200,000, all of which came from Idaho, and all of which was distributed to the individual LLC members. Each of the members will pay tax on his or her individual state tax return on his or her portion of the $200,000 in net income; the rate each member pays will vary depending on his or her overall taxable income for the year.
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 $200,000. The $200,000 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; the rate each partner pays will vary depending on his or her overall taxable income for the year.
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 $200,000. The $200,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return; the rate will vary depending on your overall taxable income for the year.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Idaho. 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 Idaho, it may be subject to Idaho 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 Idaho’s corporation income tax, check the State Tax Commission 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).