Corporate Close-Up: These State Taxes Don't Pass-Through


 

Partners, shareholders and other types of pass-through entity owners were no doubt disappointed when Kansas recently repealed its so called “pass-through entity exemption” retroactively to tax years beginning with the 2017 tax year. Before it repealed its exemption of certain business income received by pass-through owners, the Sunflower state was an outlier among states. As at the federal level, most states that levy a net income-based tax impose the tax on the income received or deemed received by the owners of pass-through entities rather than on the entity itself. Many of those states, however, impose a composite return tax or nonresident owner withholding requirement on the pass-through entity. Some jurisdictions go one step further by also imposing a tax on the entity itself.

The states impose several different types of taxes on various types of pass-through entities. Below are the main types of entity level taxes states impose, with some specific examples. 

Minimum Income Taxes

New York imposes a fixed dollar minimum tax based on gross income at the entity level on general partnerships, LLPs, LPs, LLCs, S corporations, RICs, and REITs.

Idaho imposes a minimum tax at the entity level tax on S corporations. If a general partnership, LP, LLP or S corporation has income or loss that is not distributed or otherwise reportable as part of the taxable income of another taxable entity and the entity has Idaho taxable income, the entity is subject to an additional tax. 

Minnesota imposes a minimum income tax at the entity level on partnerships, LLPs, LPs, multi-member LLCs, S corporations, RICs and REITs. 

New Jersey imposes a minimum income tax on S corporations.

Franchise (Debt- or Net Worth-Based) Taxes

Alabama imposes a business privilege tax, including a minimum business privilege tax, at the entity level on LLPs, LPs, LLCs, SMLLCs, series LLCs, S corporations, RICs and REITs. 

Oregon imposes a minimum privilege tax at the entity level on general partnerships, LLPs, LPs, multi-member LLCs, single-member LLCs, and S corporations.

Franchise Taxes on S Corporations

The states that impose a franchise tax on S corporations include Delaware, Illinois, Kentucky, Louisiana, Mississippi, North Carolina, and Nebraska.

Special Taxes

Connecticut imposes an affected business entity tax on LLPs, LPs, LLCs, SMLLCs and S corporations. 

The District of Columbia imposes the Unincorporated Business Tax on general partnerships, LLPs, LPs, LLCs taxed as partnerships and SMLLCs that are disregarded.

Kentucky imposes a limited liability entity tax (LLET) at the entity level on LLPs, multi-member LLCs, SMLLCs, and S corporations. 

Maryland imposes a nonresident member tax on general partnerships, LLPs, LPs, LLCs, SMLLCs and S corporations that have any owner who is a nonresident of Maryland. The tax imposed on the pass-through entity is treated as a tax imposed on the nonresident members and is paid on their behalf by the pass-through entity. While the tax is technically imposed on pass-through entities, it functions much like a withholding tax on nonresident members.

California imposes a franchise LLC tax on multi-member and single-member LLCs.

Illinois imposes a personal property replacement (income) tax on general partnerships, LLPs, LPs, publicly traded partnerships, LLCs, S corporations, RICs, REITs and REMICs. 

Vermont imposes an annual minimum tax at the entity level on partnerships, LLPs, LPs, multi-member LLCs, S corporations. 

Wisconsin imposes an economic development surcharge tax at the entity level on publicly traded partnerships treated as C corporations for federal income tax purposes and S corporations, as well as RICs and REITs that are treated as C corporations or S corporations. 

Taxes that Don’t Conform to Federal Pass-Through Treatment

New Hampshire does not conform to the federal tax classification of general partnerships, LLPs, LPs, publicly traded partnerships, LLCs, SMLLCs, S corporations, or Qsubs. These entities are subject to the state's business profits tax and business enterprise tax. Individual owners are subject to the state's interest and dividends tax. 

Nevada levies an annual tax (Commerce Tax) on the Nevada gross revenue of larger business entities engaged in business in the state. Each business entity with gross revenue exceeding $4 million for the taxable year must file a return and pay the tax.

Ohio imposes its Commercial Activity Tax, a privilege tax measured by gross receipts, on nearly all business entities and individuals doing business in Ohio, including RICs, REITs, and REMICs.

Tennessee does not follow the federal income tax treatment of pass-through entities; instead imposing entity level taxes under the Tennessee excise tax on LLPs, LPs, LLCs, S corporations and most LLCs.

Texas imposes its franchise tax, which is based on each entity's “taxable margin,” on most general partnerships, LLPs, LPs, multi-member LLCs, single-member LLCs, series LLCs, S corporations, and QSubs. 

Gross Receipts Taxes

Washington does not impose an income tax. The state does not follow the federal income tax treatment of partnerships, LLPs, LPs, publicly traded partnerships, multi-member LLCs, single-member LLCs, series LLCs, S corporations, QSubs, RICs, REITs, and REMICs. The state imposes a gross receipts tax called the B&O tax on all of these entities, except for RICs, REITs, and REMICs.

Delaware imposes a gross receipts tax and an annual fixed-dollar tax at the entity level on general partnerships, LLPs, LPs, multi-member, LLCs, single-member LLCs and S corporations. 

Hawaii imposes a gross receipts tax at the entity level on general partnerships, LLPs, LPs, publicly traded partnerships, LLCs, SMLLCs, S corporations, RICs, REITs and REMICs. 

New Mexico imposes a gross receipts tax at the entity level on general partnerships, LLPs, LPs, publicly traded partnerships, LLCs, SMLLCs, S corporations, RICs, REITs and REMICs. S corporations are subject to franchise tax.

Montana imposes a gross receipts tax at the entity level on certain partnerships, LLPs, LPs, LLCs, and S corporations that are qualifying public contractors.

As longtime BNA State Tax Advisory Board member Bruce Ely of Bradley Arant Boult Cummings LLP, summarized, “All of this shows that oftentimes, the question isn’t whether a pass-through entity level tax is imposed by a particular state, but what kind of tax applies. Determining this requires a rigorous analysis of each state’s tax regime and I appreciate Bloomberg BNA’s research tools.” 

Continue the discussion on LinkedIn: How does your state treat pass-through entities?

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