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.
As of the beginning of 2013, Oklahoma has a corporation income tax, a currently-suspended franchise tax, and a recently-ended business activity tax; in other words, the corporation income tax aside, Oklahoma’s business tax situation is currently in transition. Depending on various factors, your business may be subject to one, two, or none of the latter taxes. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Oklahoma’s corporation income tax is a flat 6% tax on federal taxable income, with certain adjustments. (By comparison, Oklahoma taxes personal income at a series of marginal rates ranging from 0.5% to 5.25%.) Returns are due on the 15th day of the third month after the end of the tax year; for corporations with a tax year that corresponds to the calendar year, this means March 15th.
There is a moratorium on Oklahoma’s franchise tax for taxable periods beginning July 1, 2010 and ending before July 1, 2013; as matters now stand, the franchise tax will again be charged as of July 1, 2013. The franchise tax applies to traditional (C-type) corporations and S corporations. When and where applicable, the franchise tax is assessed at the rate of $1.25 per $1,000 or fraction thereof on the amount of capital allocated, invested, or employed in Oklahoma, with a $250 minimum tax and $20,000 maximum tax.
Oklahoma’s business activity tax was enacted in 2010 to cover taxable periods in 2010, 2011, and 2012. There was a legislative attempt to extend the tax into 2013; however, as a result of a vote on a ballot question in November 2012, there will be no extension, and the business activity tax will not apply to tax years after 2012. Most of the common types of business entities doing business in Oklahoma, with the exception of sole proprietorships, have been required to file business activity tax return during the period that the tax has been in effect. For business entities that otherwise would be subject to the franchise tax (primarily traditional corporations and S corporations), the business activity tax is the greater of:
For forms of business that would not have been subject to the franchise tax (mainly LLCs and partnerships), the business activity tax is $25. Business activity tax returns are due on July 1 unless filed in conjunction with an income tax return.
Let’s briefly look at additional details for five of the most common forms of Oklahoma business: corporations (i.e., C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Oklahoma corporations are subject to Oklahoma’s corporation income and, through the end of 2012, the business activity tax.
Example: For the 2012 tax year, your Oklahoma corporation had taxable income of $500,000. Also, in 2010, your corporation paid franchise tax of $250. Other things being equal, the corporation will owe Oklahoma corporate income tax in the amount of $30,000 (6% of $500,000). The corporation will also owe business activity tax in the amount of $250 (the amount of franchise tax it paid in 2010).
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.) Oklahoma recognizes the federal S election, and Oklahoma S corporations are not required to pay corporate income tax to the state. However, Oklahoma S corporations have been required to pay the franchise tax, and through the end of 2012 are required to pay the business activity tax. In addition, an individual S corporation shareholder will owe tax on his or her share of the corporation’s income.
Example: For the 2012 tax year, your S corporation had net income of $500,000. Also, in 2010, your corporation paid franchise tax of $250. The corporation will owe business activity tax in the amount of $250 (the amount of franchise tax it paid in 2010). The $500,000 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). Like S corporations, standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Oklahoma. However, through the end of 2012, LLCs are required to pay the business activity tax. In addition, 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 Oklahoma’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 $500,000. The $500,000 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. In addition, the LLC itself will owe business activity tax in the amount of $25.
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. In addition, through the end of 2012, Oklahoma partnerships are required to pay the business activity tax.
Example: For the latest tax year, your partnership had net income of $500,000. The $500,000 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. In addition, the partnership itself will owe business activity tax in the amount of $25.
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 $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 Oklahoma. 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 Oklahoma, it may be subject to Oklahoma 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 Oklahoma’s corporation income tax, franchise tax, and business activity tax, check the Oklahoma Tax Commission website. Given the fact that the business activity tax recently ended, and the franchise will shortly come back into effect, you should also consider consulting with an Oklahoma tax professional for any questions regarding these two taxes. 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).