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 – do 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.
South Carolina has a corporate income tax, a corporate license fee, and a rule allowing a special tax rate on income or loss for owners of pass-through entities like S corporations, LLCs, and sole proprietorships. If income from your business passes through to you personally, that income will be subject to taxation on your personal South Carolina tax return but the rate may be affected by the state’s special pass-through entity owner tax-rate rule.
South Carolina’s corporate income tax, which applies to traditional (C-type) corporations, has a flat rate of 5.0%. For purposes of comparison, note that South Carolina taxes most personal income at marginal rates ranging from 0.0% to 7.0%.
South Carolina’s corporate license fee (corporation license tax), which applies to both traditional corporations and S corporations, is essentially a franchise tax based on net worth. More specifically, the fee is based on capital stock and paid-in or capital surplus, at a rate of $1.00 for every $1,000 or fraction thereof, plus a flat additional charge of $15. There is a minimum license fee of $25. The license fee is due at the same time as the annual corporate income tax return.
Under the South Carolina Income Tax Act, so-called “active trade or business income or loss” from a pass-through entity is taxed at a flat 3.0% rate. Owners of pass-through entities can have their income from those entities taxed at that relatively low rate.
Let’s briefly look at additional details for five of the most common forms of South Carolina business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
South Carolina corporations are subject to the corporate income tax and the corporate license fee.
Example: For the 2018 tax year, your South Carolina corporation had taxable income of $200,000. Also, the value of the corporation’s capital stock and paid-in surplus is $300,000. Other things being equal, your corporation will owe South Carolina corporate income tax in the amount of $10,000 (5.0% of $200,000). Your corporation also will owe a license fee in the amount of $315 ($1.00 for each $1,000 of $300,000 plus flat additional charge or $15).
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.) South Carolina recognizes the federal S election, and South Carolina S corporations are not required to pay corporate income tax to the state; however, South Carolina S corporations are required to pay the state’s corporate license fee. Also, an individual S corporation shareholder will owe tax on his or her share of the corporation’s income.
Example: For the 2018 tax year, your S corporation had taxable income of $200,000. Also, the value of the corporation’s capital stock and paid-in surplus is $300,000. The corporation will also owe a license fee in the amount of $315 ($1.00 for each $1,000 of $300,000 plus flat additional charge or $15). In addition, each shareholder will pay tax on his or her individual state tax return on his or her portion of the corporation’s net income. In most cases, as an owner of a pass-through entity, the shareholder’s tax rate will be 3%.
Like S corporations, standard LLCs are pass-through entities and, generally speaking, are not required to pay income tax to either the federal government or the State of South Carolina. Instead, an individual LLC member will owe tax on his or her share of the company’s income.
Also, 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 taxed in South Carolina in the same manner as a corporation.
Example: For the 2018 tax year, your multi-member LLC, which has the default tax classification of partnership, had net income of $200,000. Each of the LLC members will pay tax on his or her individual state tax return on his or her portion of the company’s net income. In most cases, as an owner of a pass-through entity, each member’s tax rate will be 3%.
Income from general partnerships 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 2018 tax year, your partnership had net income of $200,000. Each of the partners will pay tax on his or her individual state tax return on his or her portion of the business’s net income. In most cases, as an owner of a pass-through entity, each partner’s tax rate will be 3%.
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 $200,000. The $200,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return. In most cases, as the owner of a pass-through entity, your tax rate will be 3%.
Our primary focus here is on businesses operating solely in South Carolina. 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 South Carolina, it may be subject to South Carolina 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 South Carolina’s corporate income tax and corporate license fee, visit the South Carolina Department of Revenue. 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).
June 18, 2018