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. More particularly, 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.
New Mexico has a corporate income tax, which applies to traditional (C-type) corporations, and a franchise tax, which applies to traditional corporations and S corporations. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal New Mexico tax return.
New Mexico taxes corporate income at a series of marginal rates, as follows:
For purposes of comparison, note that New Mexico taxes personal income at a series of marginal rates ranging from 1.7% to 4.9%.
While not likely to be relevant to New Mexico-based companies, New Mexico does allow certain corporations to pay a tax on New Mexico gross receipts rather than on income; such corporations must meet all three of the following requirements:
Corporations that meet these conditions may pay an alternative tax of 0.75% of annual gross receipts from New Mexico.
New Mexico’s franchise tax is a flat annual fee of $50 that must be paid by all New Mexico corporations, including S corporations.
Both the corporate income tax and the franchise tax are due on the 15th day of the third month after the close of a business’s tax year.
Let’s briefly look at additional details for five of the most common forms of New Mexico business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. New Mexico corporations are subject to New Mexico’s corporate income tax and to the franchise tax.
Example: For the 2012 tax year, your New Mexico corporation had net income of $600,000. Other things being equal, the corporation will owe New Mexico corporate income tax in the amount of $30,400 ($24,000 plus 6.4% of net income over $500,000). The corporation will also owe the $50 franchise tax.
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.) New Mexico recognizes the federal S election, and New Mexico S corporations are not required to pay corporate income tax to the state; however, New Mexico S corporations are required to pay the $50 franchise tax. Also, an individual S corporation shareholder will owe tax on his or her share of the company’s income.
Example: For the 2012 tax year, your S corporation had net income of $600,000. Your S corporation will owe the $50 franchise tax. Each of the shareholders will pay tax on his or her individual state tax return on his or her portion of the $600,000 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 New Mexico. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them.
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 New Mexico’s corporate income tax.
Example: For the 2012 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $600,000. Each of LLC member will pay tax on his or her individual state tax return on his or her portion of the $600,000 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 2012 tax year, your partnership had net income of $600,000. The $600,000 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 New Mexico. 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 New Mexico, it may be subject to New Mexico 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 New Mexico’s corporate income tax and franchise tax, check the Taxation and Revenue Department 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).