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.
North Dakota has a corporation income tax, but no franchise or privilege tax generally applicable to businesses. Thus, for the most part, unless your business is a traditional corporation (i.e., a C corporation), the business itself will not be subject to a state tax on income or net worth. However, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
North Dakota taxes corporation income at a series of marginal rates, as follows:
- taxable income up to $25,000 = 1.68% tax
- taxable income over $25,000 up to $50,000 = $ 420.00 + 4.23% tax on amount over $25,000; and
- taxable income over $50,000 = $1,477.50 + 5.15% tax on amount over $50,000.
While not likely to apply to a North Dakota small business, a corporation that elects the so-called “water’s-edge” method to apportion income is subject to an additional 3.5% surtax on income. Also, financial institutions are subject to a separate, 6.5% income tax rate and minimum tax of $50.
Corporation income tax returns are due on or before the 15th day of the fourth month following the close of the corporation’s fiscal year; for corporations whose fiscal year is the same as the calendar year, this means returns are due on or before April 15th.
For purposes of comparison, note that North Dakota taxes personal income at marginal rates ranging from 1.51% to 3.99%
Let’s briefly look at additional details for five of the most common forms of North Dakota business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. North Dakota corporations are subject to North Dakota’s corporate income tax at rates ranging from 1.68% to 5.15%.
Example: For the 2012 tax year, your North Dakota corporation had taxable income of $200,000. Other things being equal, the corporation will owe North Dakota corporate income tax in the amount of $9,202.50 ($1,477.50 + 5.15% tax on taxable income over $150,000).
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. 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.) North Dakota recognizes the federal S election, and North Dakota S corporations are not required to pay corporate income tax to the state; however, 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 $200,000. 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 North Dakota. 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.
Note, however, 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 be subject to North Dakota’s corporation income tax.
Example: For the 2012 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $200,000. 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. 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 2012 tax year, your partnership had net income of $200,000. 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 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 taxable income for the year.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in North Dakota. 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 North Dakota, it may be subject to North Dakota 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 North Dakota’s corporation income tax, check the State Tax Commissioner 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).