Most states tax at least some types of business income derived from the state. 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.
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.
Maine has a corporate income tax, but no franchise or privilege tax generally applicable to businesses. Thus, for the most part, unless your business is a traditional corporation (a C corporation), your business itself will not be subject to a state tax on income or 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.
Maine taxes corporation income at a series of marginal rates. The specific breakdown is as follows:
- adjusted federal taxable income up to $25,000 = 3.5% tax
- adjusted federal taxable income greater than $25,000 but not more than $75,000 = $875 plus 7.93% tax on amount over $25,000
- adjusted federal taxable income greater than $75,000 but not more than $250,000 = $4,840 plus 8.33% tax on amount over $75,000; and
- adjusted federal taxable income greater than $250,000 = $19,418 plus 8.93% on amount over $250,000.
In addition, Maine has an alternative minimum tax (AMT) based on the federal AMT rules, with adjustments. The Maine corporate income tax return is due on the same date as the federal corporate income tax return (the fifteenth day of the third month after the end of the tax year).
For purposes of comparison, Maine’s personal income tax rates range from 2% to 8.5%.
Let’s briefly look at additional details for five of the most common forms of Maine business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Maine corporations are subject to Maine’s corporate income tax including Maine’s alternative minimum tax.
Example: For the latest tax year, your Maine corporation had adjusted federal taxable income of $100,000. Other things being equal, and assuming the alternative minimum tax does not apply, your corporation will owe Maine corporate income tax in the amount of $6,923 ($4,840 plus 8.33% of $25,000).
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, 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.) Maine recognizes the federal S election, and Maine S corporations are not required to pay corporate income tax to the state. However, 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 $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. Each shareholder’s rate 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 are not required to pay income tax to either the federal government or the State of Maine. Instead, income from the business is distributed to the LLC members, and each individual member is subject to federal and state taxes on his or her share of the company’s income.
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 be subject to Maine’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 $100,000. The $100,000 in net income will be divvied up between you and your fellow LLC members, and each member will pay tax on his or her own portion on his or her individual state tax return. Each member’s rate will vary depending on his or her overall taxable income for the year.
Partnerships. Income from partnerships is distributed to the individual partners, and each individual partner is subject to federal and state taxes on his or her share of the partnership’s income.
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 each partner will pay tax on his or her own portion on his or her individual state tax return. Each partner’s rate 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 $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. 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 Maine. 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 Maine, it may be subject to Maine 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 Maine’s corporate income tax, check the Revenue Services 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).