Most states tax at least some types of business income derived from the state. 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.
Louisiana has both a corporation franchise tax and a corporation income tax. Louisiana is unusual in that, by default, it taxes S corporations in the same way as traditional corporations. Consequently, the corporation franchise tax and corporation income tax both apply to Louisiana S corporations. However, there is one key exception to this unusual approach to S corporations which allows some S corporations to pay less or no state income tax. Corporation taxes aside, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Louisiana’s corporation franchise tax is a net worth tax essentially imposed for the privilege of doing business in Louisiana. The basic breakdown is as follows:
As mentioned, the franchise tax applies to both traditional corporations and to S corporations.
Louisiana’s corporation income tax is based on a series of marginal tax rates. The specific breakdown is as follows:
Like the corporation franchise tax, the corporation income tax applies not only to traditional corporations, but also, by default, to S corporations. Annual corporation franchise tax returns and corporation income tax returns both are due on or before the 15th day of the fourth month after the end of a corporation’s accounting year. (For purposes of comparison, note that Louisiana personal income tax rates range from 2% to 6%.)
In some cases, at least some S corporation income can be excluded from Louisiana’s corporation income tax. In general, the excludable portion of an S corporation’s income is based on the ratio of the number of issued and outstanding shares of the corporation’s capital stock owned by individual Louisiana residents to the total number of issued and outstanding shares of capital stock. Regardless of whether some or all of the S corporation’s income can be excluded from taxation at the corporation level, a shareholder who is a Louisiana resident must report his or her share of income from the corporation on his or her individual Louisiana tax return. (There are also several options for how the income allocated to nonresident shareholders is reported.) This should mean that, if all S corporation shareholders are Louisiana residents, then the S corporation itself will not owe corporation income tax to the state.
Let’s briefly look at additional details for five of the most common forms of Louisiana business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Louisiana corporations are subject to Louisiana’s corporation franchise tax and corporation income tax.
Example: For the latest tax year, your Louisiana corporation had $200,000 of net income and $100,000 of capital in Louisiana. Your corporation will owe the corporation franchise tax of $150 ($1.50 for each $1,000 of capital). Your corporation will also owe Louisiana corporation income tax in the amount of $12,250 (4% of first $25,000 plus 5% of next $25,000 plus 6% of next $50,000 plus 7% of next $100,000).
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, as far as federal income tax is concerned, taxable income from an S corporation passes through to the individual shareholders, and each shareholder pays federal tax on his or her share of that income on his or her individual federal tax return. In other words, at least with respect to federal taxation, 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.)
Louisiana is unusual in that it does not recognize the federal S election. Instead, Louisiana taxes S corporations in the same way as traditional corporations. More specifically, every Louisiana S corporation must pay the state’s corporation franchise tax. In addition, a Louisiana S corporation must also pay the state’s corporation income tax—at least to the extent that one or more of the corporation’s shareholders are not Louisiana residents. Furthermore, each individual shareholder must pay state tax on his or her share of the corporation’s income.
Example: For the latest tax year, your Louisiana S corporation had $200,000 of net income and $100,000 of capital in Louisiana. All corporation shareholders are Louisiana residents. Your corporation will owe the corporation franchise tax of $150 ($1.50 for each $1,000 of capital). Because all corporation shareholders are Louisiana residents, the corporation itself will not owe corporation income tax. However, 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 respective state tax returns. The rate for each shareholder will vary depending on his or her overall taxable income for the year.
Because of Louisiana’s unusual tax treatment of S corporations, you should consider consulting with a Louisiana tax professional before completing and filing your Louisiana S corporation tax return.
Limited Liability Companies (LLCs). Standard LLCs are pass-through entities that are not required to pay federal income tax. Moreover, unlike Louisiana S corporations, Louisiana LLCs are not subject to the state’s corporation franchise tax or corporation income tax. Instead, income from an LLC 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 Louisiana’s corporation income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had taxable net income of $200,000. The $200,000 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 Louisiana tax returns. Rates for each member will vary depending on his or her overall taxable income.
Partnerships. Louisiana partnerships are subject neither to Louisiana’s corporation franchise tax nor to the state’s corporation income 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 $200,000; 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 Louisiana tax returns. Rates will vary depending on overall taxable income.
Sole Proprietorships. Louisiana sole proprietorships are subject neither to Louisiana’s corporation franchise tax nor to the state’s corporation income 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 $200,000. The $200,000 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 Louisiana. 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 Louisiana, it may be subject to Louisiana 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 Louisiana’s corporation franchise tax, corporation income tax, and unusual rules for S corporations, 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).