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 corporation 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 corporation 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 corporation 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.
Nebraska has both a corporation income tax and a franchise tax known as the “corporation occupation tax.” Your business may be subject to one, both, or neither of these taxes depending on its legal form. Additionally, if income from your business passes through to you personally, that income will be subject to taxation on your personal state tax return.
Nebraska taxes the income of traditional (C-type) corporations at two marginal rates, as follows:
Corporation income tax returns are due on the 15th day of the third month after the close of the tax year. For corporations whose tax year corresponds with the calendar year, this means returns are due on March 15th. For purposes of comparison, note that Nebraska taxes personal income at marginal rates ranging from 2.56% for $2,400 or less of taxable income to 6.84% for $40,001 or more of taxable income.
Nebraska’s corporation occupation tax applies to traditional corporations and S corporations. It is a biennial tax and is based on a business’s net worth. More specifically, the specific fee due is based on the amount of paid-up capital stock in the corporation. The tax is graduated, with fees ranging from $26 for $10,000 or less or paid-up capital stock to $23,990 for $100 million or more of paid-up capital stock. (The breakdown of fees is available in a section of a Nebraska government report.)
Let’s briefly look at additional details for five of the most common forms of Nebraska business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations. Nebraska corporations are subject to Nebraska’s corporation income tax and, every other year, to the corporation occupation tax.
Example: For the 2012 tax year, your Nebraska corporation had taxable income of $400,000. Also, the amount of paid up capital stock in the corporation was $500,000. Other things being equal, your corporation will owe Nebraska corporation income tax in the amount of $29,010 (5.58% of first $100,000 plus 7.81% of remaining $300,000). Assuming corporation occupation tax is due this year, then, according to the published tax table, the corporation also will owe occupation tax in the amount of $800.
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.) Nebraska does not require S corporations to pay income tax; however, they are required to pay the state’s corporation occupation tax. In addition, each individual S corporation shareholder will owe state tax on his or her share of the company’s income.
Example: For the 2012 tax year, your Nebraska S corporation had taxable income of $400,000. Also, the amount of paid up capital stock in the corporation was $500,000. Assuming corporation occupation tax is due this year, then, according to the published tax table, the corporation will owe occupation tax in the amount of $800. Occupation tax aside, 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). Standard LLCs are pass-through entities and are not required to pay income tax to either the federal government or the State of Nebraska. LLCs are also not required to pay Nebraska’s corporation occupation tax. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amounts allocated to them.
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 Nebraska’s corporation income tax.
Example: For the latest tax year, your multi-member LLC, which has the default tax classification of partnership, had taxable income of $400,000. The $400,000 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 Nebraska tax returns. Rates will vary depending on overall taxable income.
Partnerships. Nebraska partnerships are subject neither to Nebraska’s corporation income tax nor to the state’s corporation occupation 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 $400,000; 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 Nebraska tax returns. Rates will vary depending on overall taxable income.
Sole Proprietorships. Nebraska sole proprietorships are subject neither to Nebraska’s corporation income tax nor to the state’s corporation occupation 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 Nebraska. 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 Nebraska, it may be subject to Nebraska 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 Nebraska’s corporation income tax and corporation occupation 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 Federick Daily (Nolo).