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 York has a corporation franchise tax, which applies to both traditional (C-type) corporations and to S corporations, and a tax known simply as the “filing fee,” which applies to LLCs, limited liability partnerships (LLPs), and some regular partnerships. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal New York tax return.
For traditional corporations, the amount of corporation franchise tax due is the highest of the following four amounts:
Let’s look briefly at each of these items.
Entire Net Income (ENI) is based on federal taxable income with certain New York-specific modifications. The default tax rate for ENI is 7.1%. However, lower rates apply to small business taxpayers, as follows:
Also, a lower rate of 6.5% applies to qualified New York manufacturers.
Business and Investment Capital is the total investment and business capital allocated to New York State after deducting short-term and long-term liabilities attributable to assets. It is taxed at a rate of 0.15%. The tax is capped at $350,000 for qualified New York manufacturers, and $1 million for all other taxpayers.
Minimum Taxable Income (MTI) is a business’s entire net income allocated to New York State plus certain federal tax preferences and adjustments that are allocated to New York. The current rate for most corporations is 1.5%. For eligible qualified New York manufacturers, the rate is 0.75%.
The Fixed Dollar Minimum (FDM) tax is based on a corporation's New York State receipts, as follows:
Additional FMD rules, not covered here, apply to non-New York corporations.
Corporations may also be subject to:
For New York S corporations, the corporation franchise tax generally is based on the corporation’s New York receipts, as follows:
New York S corporations that are also eligible qualified New York manufacturers pay 50% of the foregoing amounts. Also, additional rules not covered here apply to non-New York S corporations.
New York LLCs and LLPs are required to pay the state filing fee; the fee is based on a business’s New York gross income, as follows:
A regular New York partnership is only subject to the state filing fee if it has more $1 million in gross income, as follows:
For purposes of comparison, note that New York taxes personal income at marginal rates ranging from 4.00% to 8.82%.
Let’s briefly look at additional details for five of the most common forms of New York business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. New York corporations are subject to the corporation business tax, which is based on the highest of: ENI, business and investment capital, MTI, or FDM (see above).
Example: For the current tax year, the highest tax due for your New York corporation is based on entire net income, and for the year your corporation had ENI of $600,000. Your corporation is not a qualified manufacturer, has no subsidiaries, and is not located in the Metropolitan Commuter Transportation District. Because your corporation’s ENI is greater than $390,000, the corporation does not qualify as a small business taxpayer. Therefore, other things being equal, the corporation will owe New York corporation franchise tax in the amount of $42,600 (7.1% of $600,000).
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 (exceptions include cases where the S corporation has built-in gains, excess passive income, or passive investment income). 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 usually 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 York, however, does not recognize the federal S election; instead, in addition to the federal “S” election form, you must also file a New York election form. (If your business does not properly file for “S” status with the State of New York, the state will tax the business as though it were a traditional corporation.) Moreover, New York S corporations are required to pay corporation franchise tax based on New York receipts. Also, independently of any corporation franchise tax due from the business itself, each individual S corporation shareholder will owe tax on his or her share of the corporation’s net income.
Example: Your New York S corporation, which has properly filed for “S” status with the State of New York and is not an eligible qualified New York manufacturer, had New York receipts of $600,000 and net income of $300,000 for the fiscal year. Your corporation will owe New York corporation franchise tax in the amount of $300. In addition, the corporation’s $300,000 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; the rate will vary depending on your overall net income for the year.
Limited Liability Companies (LLCs). In many states, LLCs are pass-through entities and are not required to pay either federal or state income tax. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them. In New York, individual LLC members must pay state income tax on the amount distributed to them, but the LLC itself must also pay the state filing fee.
Note that 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 York’s corporation franchise tax.
Example: Your multi-member LLC, which has the default tax classification of partnership, had gross income of $300,000. Your company will owe the New York filing fee in the amount of $175. In addition, the LLC’s net income will be allocated to you and your fellow members, and you will each pay tax on your own portions on your respective state tax returns; the rate will vary depending on your overall net income for the year.
Partnerships. In many states, partnerships are pass-through entities and are not required to pay either federal or state income tax. Instead, income from the business is distributed to individual partners, who then pay federal and state taxes on the amount distributed to them. In New York, individual partners must pay state income tax on the amount distributed to them, but a partnership with at least $1 million in New York gross income must also pay the state filing fee.
Example: For the 2012 tax year, your New York partnership had net income of $300,000 and gross income of $500,000. Because gross income was less than $1 million, the partnership does not owe the filing fee. The $300,000 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 will vary depending on your overall net 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 2012 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 net income for the year.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in New York. 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 York, it may be subject to New York 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 guidance on New York’s corporation franchise tax and state filing fee, check the Department of Taxation and Finance 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).
Note: New York has one of the most complicated business tax schemes in the country. Certain rules are not covered here. If you cannot find clear answers to your questions from the Department of Taxation and Finance website, you should consult with a New York tax professional.