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. 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 most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. 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, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently 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 justified as a tax simply for the 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.
Alaska is like most states in that it has a corporate income tax, but unlike many states in that it does not have any franchise or privilege tax generally applicable to businesses. Moreover, unlike most states, Alaska does not have a personal income tax. Thus, for the most part, unless your business is a traditional corporation (a C corporation), neither your business’s income nor its net worth will be subject to state taxation. More particularly, and unlike those many other states that have personal income tax, if income from your business passes through to you personally, that income will not be subject to taxation on your personal state tax return.
Alaska taxes the net income of corporations at a range of rates. The specific breakdown is as follows:
Payment of the corporation net income tax is due on the 15th day of the fourth month following the close of your corporation’s tax year. Thus, if your business’s tax year is the same as the calendar year, the corporation net income tax payment is due on April 15th. The tax return is due on the 15th day of the fifth month following the close of your corporation’s tax year. Thus, if your business’s tax year is the same as the calendar year, the corporation net income tax payment is due on May 15th.
Alaska has other business-related taxes, such as a personal holding company tax, an accumulated earnings tax, and an alternative tax on capital gains. However, for many small businesses, these taxes will not come into play. Alaska also charges a tax equivalent to 18% of a business’s federal alternative minimum tax. Again, this tax may not be relevant to most small businesses. Finally, local governments charge taxes on the value of business property up to a maximum of 3%.
Let’s briefly look at additional details for five of the most common forms of Alaska business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Alaska corporations are subject to Alaska’s corporate income tax at a rate that varies based on the corporation’s taxable income.
Example: For the latest tax year, your corporation had a taxable income of $100,000. Other things being equal, the corporation will owe Alaska corporate income tax in the amount of $7,230 ($2,230 base tax plus 5% of $100,000). In the event that your corporation was liable for some amount of federal alternative minimum tax, it would owe $18% of that amount to the state.
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 be actually distributed to the shareholder in order for the shareholder to owe tax on that amount.) Alaska recognizes the federal S election, and Alaska S corporations are not required to pay income tax to the state. In addition, because Alaska has no personal income tax, S corporation shareholders also are not required to pay tax on their income from the S corporation.
Example: For the latest tax year, your S corporation had net income of $100,000. The $100,000 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 federal tax returns; however, you will owe no tax on this money on your Alaska tax returns.
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 Alaska. Instead, income from the business is distributed to individual LLC members, who then pay federal taxes on the amount distributed to them. However, because Alaska has no personal income tax, LLC members are not required to pay tax to the state on their income from the LLC.
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 also be subject to Alaska’s corporation net income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $100,000. The $100,000 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 federal tax returns. However, you will owe no tax on this money on your Alaska tax returns.
Partnerships. Income from partnerships is distributed to the individual partners, who then pay federal tax on the amount distributed to them. However, because Alaska has no personal income tax, partners are not required to pay tax to the state on their income from the partnership.
Example: For the latest tax year, your partnership had net income of $100,000. The $100,000 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 federal tax returns; however, you will owe no tax on this money on your Alaska tax returns.
Sole Proprietorships. Income from your business will be distributed to you as the sole proprietor, and you will pay federal tax on that income. However, because Alaska has no personal income tax, you are not required to pay tax to the state on your income from the sole proprietorship.
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 tax return; however, you will owe no tax on this money on your Alaska tax return.
Note on Multistate Businesses and Nexus
Our primary focus here is on businesses operating solely in Alaska. 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 Alaska, it may be subject to Alaska 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 Alaska’s corporation net income 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 Frederick Daily (Nolo).