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.
Mississippi has both a corporate income tax and a corporate franchise tax. Your business may be subject to one, both, or neither of these taxes depending on its legal form. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
The corporate income tax applies to traditional (C-type) corporations. It is based on a series of marginal rates. The specific breakdown is as follows:
For purposes of comparison, note that Mississippi taxes personal income at exactly the same rates as corporate income.
The corporate franchise tax—which applies to both traditional corporations and S corporations—is based on an element of a business’s net worth. More specifically, the tax is computed at $2.50 per $1,000 of the greater of:
There is a minimum franchise tax of $25.
Let’s very briefly look at additional details for five of the most common forms of Mississippi business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Mississippi corporations are subject to Mississippi’s corporate income tax at marginal rates ranging from 3% to 5% of taxable income. In addition, Mississippi corporations must pay the corporate franchise tax.
Example: For the 2012 tax year, your Mississippi corporation had taxable income of $400,000. Also, the value of the corporation’s capital was greater than that of its property in the state; the value of the capital was $200,000. Your corporation will owe Mississippi corporate income tax in the amount of $19,650 (3% of first $5,000 plus 4% of next $5,000 plus 5% of remaining $390,000). The corporation will also owe Mississippi corporate franchise tax in the amount of $500 ($200,000 of capital taxed at $2.50 per $1,000).
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 actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Mississippi does not require S corporations to pay income tax. However, they are required to pay the state’s corporate franchise tax. In addition, each individual S corporation shareholder will owe state tax on his or her share of the company’s income.
Example: For the 2012 tax year, your Mississippi S corporation had taxable income of $400,000. Also, the value of the corporation’s capital was greater than that of its property in the state; the value of the capital was $200,000. The corporation will owe Mississippi corporate franchise tax in the amount of $500 ($200,000 of capital taxed at $2.50 per $1,000). The franchise tax aside, 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 individual state tax returns. Rates will vary depending on overall taxable income.
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 Mississippi. LLCs are also not required to pay Mississippi’s corporate franchise tax. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amounts allocated to them.
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 both to Mississippi’s corporate income tax and corporate franchise tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had taxable income of $400,000. The $400,000 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, individual Mississippi tax returns; rates will vary depending on overall taxable income.
Partnerships. Mississippi partnerships are subject neither to Mississippi’s corporate income tax nor to the state’s corporate franchise tax. Instead, income from the business 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 $400,000. This amount will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective, individual Mississippi tax returns; rates will vary depending on overall taxable income.
Sole Proprietorships. Mississippi sole proprietorships are subject neither to Mississippi’s corporate income tax nor to the state’s corporate franchise tax. Instead, income from your business will be distributed to you as the sole proprietor, and you will pay tax on that income on your individual federal and state tax returns.
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 and state tax returns.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Mississippi. 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 Mississippi, it may be subject to Mississippi 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 Mississippi’s corporate income tax and corporate franchise 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).