Minnesota State Business Income Tax

What kind of tax will you owe on Minnesota 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.

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.

Minnesota has two important taxes that apply to business entities:

  • a corporation income tax, somewhat confusingly called the “corporation franchise tax,” that applies to traditional (C-type) corporations; and
  • a tax called simply the “minimum fee” that applies to traditional corporations, S corporations, LLCs, and partnerships.

In addition to the latter taxes, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.

Minnesota’s corporation franchise tax, which is a tax on the income of traditional corporations, is comprised of a flat 9.8% tax plus an additional, alternative minimum tax (AMT). In general terms, the AMT is based largely on the federal AMT rules, and is a 5.8% tax on Minnesota alternative minimum taxable income in excess of $40,000.

Minnesota’s “minimum fee” tax applies to traditional corporations, S corporations, LLCs, and partnerships. The minimum fee is based on the combined value of a business’s property, payroll, and sales. If these three values together total at least $500,000, the business is required to pay the minimum fee. The exact amount of the minimum fee will vary depending on the total value of property, payroll, and sales, as follows:

  • total value less than $500,000 = $0 minimum fee
  • total value $500,000 to $999,999 = $100 minimum fee
  • total value $1,000,000 to $4,999,999 = $300 minimum fee
  • total value $5,000,000 to $9,999,999 = $1,000 minimum fee
  • total value $10,000,000 to $19,999,999 = $2,000 minimum fee
  • total value $20,000,000 or more = $5,000 minimum fee

For corporations, returns are due on the 15th day of the third month after the end of the tax year. For other forms of business, returns are due on the 15th day of the fourth month after the end of the tax year.

For purposes of comparison, note that Minnesota generally taxes personal income at rates ranging from of 5.35% to 7.85%.

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

Corporations. Minnesota corporations are subject to Minnesota’s corporation franchise tax, which is a tax on corporation income at a flat 9.8% rate, as well as an additional, alternative minimum tax (AMT). Minnesota corporations are also subject to the minimum fee, a tax incurred when the combined value of property, payroll, and sales is $500,000 or more.

Example: For the latest tax year, your Minnesota corporation had taxable income of $1,000,000, and the combined value of the corporation’s Minnesota property, payroll, and sales was also $1,000,000. Assuming the AMT does not apply, the corporation will owe Minnesota corporation franchise tax in the amount of $98,000 (9.8% of $1,000,000). The corporation will also owe a minimum fee $300.

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.) While Minnesota recognizes the federal S election, the state nonetheless requires S corporations with Minnesota property, payroll, and sales of $500,000 or more to pay the minimum fee. In addition, each 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, and the combined value of the corporation’s Minnesota property, payroll, and sales was also $200,000. Your S corporation will not owe any minimum fee. The $200,000 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). Standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Minnesota. However, in Minnesota, an LLC is required to pay the minimum fee if its property, payroll, and sales total $500,000 or more. The minimum fee aside, income from a Minnesota LLC 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 Minnesota’s corporation franchise 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, and the combined value of the LLC’s Minnesota property, payroll, and sales was also $200,000. Your LLC will not owe any minimum fee. The $200,000 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. Minnesota partnerships are pass-through entities and are not required to pay income tax to either the federal government or the State of Minnesota. However, in Minnesota, a partnership is required to pay the minimum fee if its property, payroll, and sales total $500,000 or more. The minimum fee aside, income from the partnership is distributed to the partners, and each partner is subject to federal and state taxes on his or her share of the company’s income.

Example: For the latest tax year, your partnership had net income of $200,000, and the combined value of the partnership’s Minnesota property, payroll, and sales was also $200,000. Your partnership will not owe any minimum fee. The $200,000 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 $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. Your 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 Minnesota. 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 Minnesota, it may be subject to Minnesota 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 Minnesota’s corporate 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).

January 2013

 

by: , Contributing Author

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