Massachusetts State Business Income Tax

What kind of tax will you owe on Massachusetts business income?

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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.

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.

Massachusetts has a “corporate excise tax” which generally speaking is based both on income and net worth. The tax applies to traditional corporations and, at least to some extent, to S corporations. There is no entity-level tax that applies to other forms of business, such as LLCs or partnerships. However, if income from your business passes through to you personally, then regardless of the legal form of your business, that income will be subject to taxation on your personal state tax return.

For traditional corporations (C corporations), the corporate excise tax generally is the sum of two amounts:

  • a tax of $2.60 per $1,000 of the greater of either taxable Massachusetts tangible personal property or taxable net worth; and
  • an 8.00% tax on income attributable to Massachusetts.

There is a minimum excise tax for corporations of $456.

The amount of corporate excise tax that an S corporation generally is required to pay depends in part on the corporation’s gross receipts. More specifically:

  • If an S corporation’s gross receipts are less than $6 million, the corporation owes a tax of $2.60 per $1,000 ofeither taxable Massachusetts tangible personal property or taxable net worth.
  • If an S corporation’s gross receipts are $6 million or more, the corporation not only owes the latter amount based on property or net worth, but also owes a tax of 1.83% on its gross receipts.
  • If an S corporation’s gross receipts are $9 million or more, the corporation not only owes the foregoing amount based on property or net worth, but also owes a tax of 2.75% on its gross receipts.

In addition, S corporations, like traditional corporations, are required to pay a minimum excise tax of $456.

Determining which of the two values, tangible personal property or net worth, a traditional corporation or S corporation needs to pay tax on requires working through a special Massachusetts tax schedule (Form 355, Schedule B for traditional corporations and Form 355S, Schedule B for S corporations).

For the sake of comparison, note that Massachusetts taxes most personal income at a flat rate of 5.3%.

Let’s briefly look at additional details for five of the most common forms of Massachusetts business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations. Massachusetts corporations are subject to Massachusetts’s corporate excise tax, which is based on both a measure of net worth and on income.

Example: For the latest tax year, based on Massachusetts Form 335, Schedule B, your Massachusetts corporation would incur a greater corporate tax based on its taxable tangible personal property than on its taxable net worth: the total value of the Massachusetts taxable tangible personal property for your corporation is $100,000. In addition, your corporation had income attributable to Massachusetts in the amount of $200,000. Your corporation will owe Massachusetts corporate excise tax in the amount of $16,260 ($2.60 per $1,000 of taxable tangible personal property plus 8.0% of net income).

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, as far as federal income tax is concerned, taxable income from an S corporation passes through to the individual shareholders, and each shareholder pays federal tax on his or her share of that income on his or her individual federal tax return. In other words, at least with respect to federal taxation, 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.)

Massachusetts is unusual in that it requires S corporations to pay corporate excise tax on either taxable tangible personal property or on net worth. In addition, S corporations with at least $6 million, but less than $9 million, in gross receipts are required to pay a tax on those receipts at a rate of 1.83%, and S corporations with $9 million or more in gross receipts are required to pay a tax on those receipts at a rate of 2.75%. Finally, apart from the latter, entity-level taxes, each individual shareholder must pay state tax on his or her share of the corporation’s income.

Example: For the latest tax year, based on Massachusetts Form 335S, Schedule B, your Massachusetts S corporation would incur a greater corporate tax based on its taxable tangible personal property than on its taxable net worth; the total value of the Massachusetts taxable tangible personal property for your S corporation is $100,000 . The corporation had less than $6 million in gross receipts so no tax is due on gross receipts. Other things being equal, your corporation will owe corporate excise tax in the amount of $260 ($2.60 per $1,000 of taxable tangible personal property). In addition, the corporation’s 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; in most cases, shareholders will pay tax at a rate of 5.3%.

Limited Liability Companies (LLCs). Standard Massachusetts LLCs are pass-through entities at both the federal and state levels. They are not required to pay income tax to the federal government, and they are not subject to Massachusetts’s corporate excise tax. 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 Massachusetts’s corporation excise 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. In most cases, members will pay tax at a rate of 5.3%.

Partnerships. Massachusetts partnerships are pass-through entities at both the federal and state levels. They are not required to pay income tax to the federal government, and they are not subject to Massachusetts’s corporate excise tax. Instead, 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. In most cases, partners will pay tax at a rate of 5.3%.

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. In most cases, you will pay tax at a rate of 5.30%.

Note on Multistate Businesses and “Nexus”

Our primary focus here is on businesses operating solely in Massachusetts. However, 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 Massachusetts, it may be subject to Massachusetts 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.

Additional Information

For further guidance on Massachusetts’s corporate excise 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).

January 2013

 

by: , Contributing Author

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