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 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.
Georgia has both a corporation net worth tax and a corporate income tax. Your business may be subject to one, both, or neither of these taxes. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
The net worth tax applies to both traditional (C) corporations and S corporations. Net worth is based on capital stock, paid in surplus, and retained earnings. The tax is graduated, and ranges from a minimum $10 for $10,000 or less of net worth (including negative net worth) up to a maximum of $5,000 for net worth over $22 million. A complete net worth tax table for the 2012 tax year is contained in Georgia booklet IT 611. For corporations whose fiscal year follows the calendar year, the corporation franchise tax is due on March 15th. Otherwise, the tax is due on the 15th day of the third month after the end of the corporation’s fiscal year.
Traditional corporations must also pay Georgia’s corporate income at a flat rate of 6% of federal taxable income, with adjustments. For corporations whose fiscal year follows the calendar year, the corporation franchise tax is due on March 15th. Otherwise, the tax is due on the 15th day of the third month after the end of the corporation’s fiscal year.
Let’s briefly look at additional details for five of the most common forms of Georgia business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Georgia corporations are subject to Georgia’s corporate income tax at a flat rate of 6% of federal taxable income, with adjustments. In addition, Georgia corporations must pay the corporation net worth tax.
Example: For the 2012 tax year, your Georgia corporation had federal taxable income of $500,000 and the corporation’s net worth, based on capital stock, paid in surplus, and retained earnings, was $1,000,000. Other things being equal, and excluding adjustments, your corporation will owe Georgia corporate income tax in the amount of $30,000 (6% of $500,000). The corporation will also owe Georgia corporation net worth tax in the amount of $500 (based on the tax table in IT 611).
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 actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Georgia recognizes the federal S election in cases where all corporation shareholders are Georgia residents. In such cases, a Georgia S corporation is not required to pay income tax to the state. (Note, however, that special rules, not covered here, apply if there are corporation shareholders who are nonresidents.) Each individual S corporation shareholder will owe state tax on his or her share of the company’s income. S corporations are also required to the pay the corporation net worth tax.
Example: For the 2012 tax year, your Georgia S corporation, for which all shareholders are Georgia residents, had federal taxable income of $500,000 and the corporation’s net worth, based on capital stock, paid in surplus, and retained earnings, was $1,000,000. The corporation will owe Georgia corporation net worth tax in the amount of $500 (based on the tax table in IT 611). The corporation’s net income will be allocated to you and your fellow shareholders, and you will each pay tax on your own portions on your individual state tax returns. Rates will vary depending on overall taxable income.
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 Georgia. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amounts allocated to them.
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 both to Georgia’s 6% corporate income tax and the corporation net worth tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had federal taxable income of $500,000. The $500,000 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, individual Georgia tax returns. Rates will vary depending on overall taxable income.
Partnerships. Georgia partnerships are subject neither to Georgia’s corporate income tax nor to the state’s net worth tax. Instead, income from the business 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 latest tax year, your partnership had net income of $500,000. This amount will be divvied up between you and your fellow partners, and you will each pay tax on your respective portions on your respective, individual Georgia tax returns. Rates will vary depending on overall taxable income.
Sole Proprietorships. Georgia sole proprietorships are subject neither to Georgia’s corporate income tax nor to the state’s net worth tax. Instead, income from your business will be distributed to you as the sole proprietor, and you will pay tax on that income on your individual federal and state tax returns.
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 and state tax returns.
Note on Multistate Businesses and “Nexus”
Our primary focus here is on businesses operating solely in Georgia. However, if you’re doing business in several states, 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 Georgia, it may be subject to Georgia 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 Georgia’s corporation income tax and corporate net worth 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).