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Business Income Taxes

Business Income Taxes

As states slowly recover from the Great Recession,  many lawmakers are looking for ways to lower business income tax burdens as a way of growing and attracting new jobs. 

he majority of states levy the corporation income tax at a flat rate, although 13 states impose a graduated corporate income tax.  In the states with flat rates, rates range from a low of 4.63 percent in Colorado (Kansas has a flat rate of 4 percent, plus a surcharge of 3 percent on taxable income over $50,000) to a high of 9.99 percent in Pennsylvania.  In states with graduated rates, the range is from a low of 1 percent of taxable income below $3,000 in Arkansas to 12 percent of income above $250,000 in Iowa.  Most states with a corporation income tax levy a minimum tax at a fixed dollar amount, ranging from $20 in Idaho to $800 in California (New Jersey’s minimum tax is $2,000 for groups with total payroll of $5 million or more). 

A few states use gross receipts as the basis for taxing corporations.  Ohio phased out the corporation franchise (income) tax over five years, beginning in 2006, at a rate of 20 percent per year and adopted a gross receipts tax, known as the Commercial Activity Tax (CAT).  It is equal to$150 for gross receipts greater than $150,000 and up to $1 million. For amounts greater than $1 million, the tax is 0.26 percent.  Washington also imposes a business and occupancy tax on gross receipts.  The tax rates vary by industry as follows: Retailing (generally)—0.471 percent of gross proceeds of sales; Wholesaling—0.484 percent of gross proceeds of sales; Manufacturing—0.484 percent of value of products manufactured; Services and other activities—1.5 percent of gross income.

New Hampshire taxes corporations using a modified value-added tax.  A tax is levied at 0.75 percent on the taxable enterprise value tax base, plus a 8.5 percent tax on business profits.

Table 1 lists the rate structure in each state.


Range of State Corporate Income Tax Rates

Table 1. Range of State Corporate Income Tax Rates
For Tax Year 2013, as of January 1, 2013
State Tax Rate (percent) Tax Brackets Number of Brackets Tax Rate (a) (percent) Financial Inst. Federal Income Tax Deductable
Alabama 6.5 —Flat Rate— 1 6.5 Yes
Alaska 1.0 - 9.4 $9,999 $90,000 10 1.0 - 9.4  
Arizona 6.968 (b) —Flat Rate— 1 6.968 (b)  
Arkansas 1.0 - 6.5 $3,000 $100,001 6 1.0 - 6.5  
California 8.84 (c) —Flat Rate— 1 10.84 (c)  
Colorado 4.63 —Flat Rate— 1 4.63  
Connecticut 7.5 (d) —Flat Rate— 1 7.5 (d)  
Delaware 8.7 —Flat Rate— 1 8.7-1.7 (e)  
Florida 5.5 (f) —Flat Rate— 1 5.5 (f)  
Georgia 6 —Flat Rate— 1 6  
Hawaii 4.4 - 6.4 (g) $25,000 $100,001 3 7.92 (g)  
Idaho 7.4 (h) —Flat Rate— 1 7.4 (h)  
Illinois 9.5 (i) —Flat Rate— 1 9.5 (i)  
Indiana 8.0 (j) —Flat Rate— 1 8.5  
Iowa 6.0 - 12.0 $25,000 $250,001 4 5 Yes (k)
Kansas 4.0 (l) —Flat Rate— 1 2.25 (l)  
Kentucky 4.0 – 6.0 $50,000 $100,001 3 —- (a)  
Louisiana 4.0 - 8.0 $25,000 $200,001 5 4.0 – 8.0 Yes
Maine 3.5 - 8.93 $25,000 $250,000 4 1 (m)  
Maryland 8.25 —Flat Rate— 1 8.25  
Massachusetts 8.0 (n) —Flat Rate— 1 9.0 (n)  
Michigan 6.0 —Flat Rate— 1 —- (a)  
Minnesota 9.8 (o) —Flat Rate— 1 9.8 (o)  
Mississippi 3.0 - 5.0 $5,000 $10,001 3 3.0 - 5.0  
Missouri 6.25 —Flat Rate— 1 7 Yes (k)
Montana 6.75 (p) —Flat Rate— 1 6.75 (p)  
Nebraska 5.58 - 7.81 100,000 2 —- (a)  
Nevada No corporate income tax
New Hampshire 8.5 (q) —Flat Rate— 1 8.5 (q)  
New Jersey 9.0 (r) —Flat Rate— 1 9.0 (r)  
New Mexico 4.8 - 7.6 $500,000 $1 million 3 4.8 - 7.6  
New York 7.1 (s) —Flat Rate— 1 7.1 (s)  
North Carolina 6.9 —Flat Rate— 1 6.9 (t)  
North Dakota 1.68 – 5.15 $25,000 $50,001 3 7 (b) Yes
Ohio (u)     —- (u)  
Oklahoma 6 —Flat Rate— 1 6  
Oregon 6.6 – 7.6(v) $10 million 2 6.6 – 7.6 (v)  
Pennsylvania 9.99 —Flat Rate— 1 —- (a)  
Rhode Island 9.0 (b) —Flat Rate— 1 9.0 (v)  
South Carolina 5 —Flat Rate— 1 4.5 (w)  
South Dakota —- No corporate income tax   6.0-0.25% (b)  
Tennessee 6.5 —Flat Rate— 1 6.5  
Texas (x)     (x)  
Utah 5.0 (b) —Flat Rate—   5.0 (b)  
Vermont 6.0 – 8.5 (b) $10,000 $25,000 3 —- (a)  
Virginia 6 —Flat Rate— 1 6.0  
Washington No corporate income tax
West Virginia 7.0 (y) —Flat Rate—a 1 7.0 (y)  
Wisconsin 7.9 —Flat Rate— 1 7.9  
Wyoming No corporate income tax
District of Columbia 9.975 (b) —Flat Rate— 1 9.975 (b)  
Puerto Rico            
 (a) Rates listed include the corporate tax rate applied to financial institutions or excise taxes based on income. Some states have other taxes based upon the value of deposits or shares.
(b) Minimum tax is $50 in Arizona, $50 in North Dakota (banks), $500 in Rhode Island, $200 per location in South Dakota (banks), $100 in Utah, $250 in Vermont; $100 in the District of Columbia.
(c) Minimum corporation franchise tax is $800. The additional alternative minimum tax is levied at a 6.65% rate.
(d) Connecticut’s tax is the greater of the 7.5% tax on net income, a 0.31% tax on capital stock and surplus  (maximum tax $1 million) or $250 (the minimum tax).  Plus, an additional 20% surtax applies for tax years 2012 and 2013.
(e) The Delaware Bank marginal rate decreases over 4 brackets ranging from $20 to $650 million in taxable income. Building and loan associations are taxed at a flat 8.7%.
(f) Or 3.3% Alternative Minimum Tax. An exemption of $50,000 is allowed.
(g) Capital gains are taxed at 4%. Financial institutions pay a franchise tax of 7.92% of taxable income (in lieu of the corporate income tax and general excise taxes).
(h) Idaho’s minimum tax on a corporation is $20. The $10 Permanent Building Fund Tax must be paid by each corporation in a unitary group filing a combined return. Taxpayers with gross sales in Idaho under $100,000, and with no property or payroll in Idaho, may elect to pay 1% on such sales (instead of the tax on net income).
 
(i) The Illinois rate of 9.5% is the sum of a corporate income tax rate of 7.0% plus a replacement tax of 2.5%.
 
(j) The Indiana tax rate is scheduled to decrease to 7.5% on July 1, 2013.
 
(k) 50% of the federal income tax is deductible.
 
(l) In addition to the flat 4% corporate income tax, Kansas levies a 3.0% surtax on taxable income over $50,000. Banks pay a privilege tax of 2.25% of net income, plus a surtax of 2.125% (2.25% for savings and loans, trust companies, and federally chartered savings banks) on net income in excess of $25,000.
 
(m) The state franchise tax on financial institutions is either (1) the sum of 1% of the Maine net income of the financial institution for the taxable year, plus 8¢ per $1,000 of the institution's Maine assets as of the end of its taxable year, or (2) 39¢ per $1,000 of the institution's Maine assets as of the end of its taxable year.
 
(n) Business and manufacturing corporations pay an additional tax of $2.60 per $1,000 on either taxable Massachusetts tangible property or taxable net worth allocable to the state (for intangible property corporations). The minimum tax for both corporations and financial institutions is $456.
 
(o) In addition, Minnesota levies a 5.8% tentative minimum tax on Alternative Minimum Taxable Income.
 
(p) Montana levies a 7% tax on taxpayers using water's edge combination. The minimum tax per corporation is $50; the $50 minimum applies to each corporation included on a combined tax return. Taxpayers with gross sales in Montana of $100,000 or less may pay an alternative tax of 0.5% on such sales, instead of the net income tax.
 
(q) New Hampshire’s 8.5% Business Profits Tax is imposed on both corporations and unincorporated associations with gross income over $50,000. In addition, New Hampshire levies a Business Enterprise Tax of 0.75% on the enterprise base (total compensation, interest and dividends paid) for businesses with gross income over $150,000 or base over $75,000.
 
(r) In New Jersey small businesses with annual entire net income under $100,000 pay a tax rate of 7.5%; businesses with income under $50,000 pay 6.5%. The minimum Corporation Business Tax is based on New Jersey gross receipts. It ranges from $500 for a corporation with gross receipts less than $100,000, to $2,000 for a corporation with gross receipts of $1 million or more.
 
(s) New York’s General business corporate rate shown. Corporations may also be subject to AMT tax at 1.5% (3% banks), or a capital stocks tax. A minimum tax ranges from $25 to $5,000, depending on receipts ($250 minimum for banks). Certain qualified New York manufacturers pay 6.5%. Small business taxpayers in New York pay rates of 6.5%, 7.1%, and 4.35% on 3 brackets of entire net income up to $390,000.
 
(t) In North Carolina financial institutions are also subject to a tax equal to $30 per one million in assets.
 
(u) Ohio no longer levies a tax based on income (except for a particular subset of corporations), but instead imposes a Commercial Activity Tax (CAT) equal to $150 for gross receipts sitused to Ohio of between $150,000 and $1 million, plus 0.26% of gross receipts over $1 million. Banks continue to pay a franchise tax of 1.3% of net worth. For those few corporations for whom the franchise tax on net worth or net income still applies, a litter tax also applies.
 
(v) Oregon’s minimum tax for C corporations depends on the Oregon sales of the filing group. The minimum tax ranges from $150 for corporations with sales under $500,000, up to $100,000 for companies with sales of $100 million or above.
 
(w) South Carolina taxes savings and loans at a 6% rate.
 
(x) Texas imposes a Franchise Tax, otherwise known as margin tax, imposed on entities with more than $1,030,000 total revenues at rate of 1%, or 0.5% for entities primarily engaged in retail or wholesale trade, on lesser of 70% of total revenues or 100% of gross receipts after deductions for either compensation or cost of goods sold.
 
(y) West Virginia’s corporate rate is scheduled to decline to 6.5% after 2013.
Source: Compiled by FTA from various sources, 2013. (For future updates, this information is available at www.taxadmin.org.)

State Apportionment of Corporate Income Formulas for Tax Year 2013

States also offer a wide variety of tax credits and deductions that are designed to provide incentives for business expenditures in certain areas.  Common credits include investment in machinery and equipment, research and development, employee training and investments in designated economic zones.

Corporations that conduct business in more than one state must apportion their incomes and assets among those states.  Until recently, most states followed a method developed in the 1950s that deploys a formula that gives equal weight to sales, payroll and property.  States calculate the percentage of sales, payroll and property attributable to each state and apply the aggregate percentage to their total income.  However more states are moving to procedures that give additional weight to the sales factor.  Increasing the sales factor portion of the apportionment percentage tends to favor businesses who use a large amount of property, plant, and equipment and/or who employ a lot of labor in the state in relation to the amount of sales to customers in the state.  This method also favors firms that export products for sale in other states.  Table 2 shows state apportionment formulas.

States also offer a wide variety of tax credits and deductions that are designed to provide incentives for business expenditures in certain areas.  Common credits include investment in machinery and equipment, research and development, employee training and investments in designated economic zones.
Corporations that conduct business in more than one state must apportion their incomes and assets among those states.  Until recently, most states followed a method developed in the 1950s that deploys a formula that gives equal weight to sales, payroll and property.  States calculate the percentage of sales, payroll and property attributable to each state and apply the aggregate percentage to their total income.  However more states are moving to procedures that give additional weight to the sales factor.  Increasing the sales factor portion of the apportionment percentage tends to favor businesses who use a large amount of property, plant, and equipment and/or who employ a lot of labor in the state in relation to the amount of sales to customers in the state.  This method also favors firms that export products for sale in other states.  Table 2 shows state apportionment formulas.

 
Table 2. State Apportionment of Corporate Income
Formulas for Tax Year 2013
 
State/ Jurisdiction 3 Factor Double Weighted Sales No State Income Tax Single Sales Property Payroll Triple Weighted Sales
Alabama *   x          
Alaska * x            
Arizona *   x          
Arkansas *   x          
California *       x      
Colorado *       x      
Connecticut   x   x      
Delaware x            
Florida *   x   x      
Georgia       x      
Hawaii * x            
Idaho *   x          
Illinois       x      
Indiana       x      
Iowa       x      
Kansas * x            
Kentucky *   x          
Louisiana x     x      
Maine *       x      
Maryland   x   x      
Massachusetts*   x          
Michigan       x      
Minnesota       96% 2% 2%  
Mississippi       x      
Missouri * x     x      
Montana * x            
Nebraska       x      
Nevada     x        
New Hampshire   x          
New Jersey       90% 5% 5%  
New Mexico * x            
New York       x      
North Carolina    x          
North Dakota * x            
Ohio (1)             x
Oklahoma x x          
Oregon *       x      
Pennsylvania *       x      
Rhode Island x            
South Carolina       x      
South Dakota     x        
Tennessee *   x          
Texas       x      
Utah *       x      
Vermont   x          
Virginia   x          
Washington     x        
West Virginia   x          
Wisconsin *       x      
Wyoming     x        
District of Columbia   x        
Notes: Some industries have special formula different than those reported.
 (1) Ohio has no corporate income tax.  A three-factor formula with triple weighted sales factor is used to determine corporate franchise tax.
Source: Compiled by NCSL from various sources, 2013.

State reliance on corporate income taxes as a revenue source is declining.  Reliance peaked at 9.7 percent of state tax collections in the late 1970s and has steadily dropped since then.  It is now the smallest source of state revenues of all the major tax categories, providing just 5 percent of state own-source revenues in fiscal year 2012. 

Several factors may be responsible for the decline in the share of state revenues from corporation income taxes. First, as mentioned above, more states are using apportionment formulas that weight sales more heavily.  This allows interstate firms to legally avoid taxation on some income.  Second, states have expanded the use of credits, incentives and abatements to lure businesses and create jobs. The cumulative effect of these provisions may be eroding overall corporation income tax collections in relation to other taxes.  Finally, is the popularity of pass-through entities.  Sole proprietorships, partnerships, S corporations and LLCs are considered pass-through, or flow-through, entities because the income of the entity flows through the business to owners or investors. As such, profits from these entities are taxed as ordinary income of owners (through the personal income tax) instead of as a corporate entity. 

Pass-through structures also alleviate one of the long-standing criticisms of corporate taxation, which is the notion of double taxation. This occurs when profits of the corporation are taxed and then the dividends that flow to shareholders is taxed again as personal income.  However, only businesses structured as corporations are subject to double taxation of income.

The future of the state corporate income tax is unclear.  There have been a lot of attempts in state legislatures over the past few years to further reduce or eliminate corporate income taxes and they seem likely to continue.  Businesses contend that state corporate income taxes do not pose as big of a burden on them as other state and local taxes, such as personal property taxes and sales taxes levied on business inputs.  Yet, the costs are far too great for most states to even contemplate changing those taxes.  As a result, state corporate income taxes may remain on the chopping block for a while longer.State reliance on corporate income taxes as a revenue source is declining.  Reliance peaked at 9.7 percent of state tax collections in the late 1970s and has steadily dropped since then.  It is now the smallest source of state revenues of all the major tax categories, providing just 5 percent of state own-source revenues in fiscal year 2012. 
Several factors may be responsible for the decline in the share of state revenues from corporation income taxes. First, as mentioned above, more states are using apportionment formulas that weight sales more heavily.  This allows interstate firms to legally avoid taxation on some income.  Second, states have expanded the use of credits, incentives and abatements to lure businesses and create jobs. The cumulative effect of these provisions may be eroding overall corporation income tax collections in relation to other taxes.  Finally, is the popularity of pass-through entities.  Sole proprietorships, partnerships, S corporations and LLCs are considered pass-through, or flow-through, entities because the income of the entity flows through the business to owners or investors. As such, profits from these entities are taxed as ordinary income of owners (through the personal income tax) instead of as a corporate entity. 
Pass-through structures also alleviate one of the long-standing criticisms of corporate taxation, which is the notion of double taxation. This occurs when profits of the corporation are taxed and then the dividends that flow to shareholders is taxed again as personal income.  However, only businesses structured as corporations are subject to double taxation of income.
The future of the state corporate income tax is unclear.  There have been a lot of attempts in state legislatures over the past few years to further reduce or eliminate corporate income taxes and they seem likely to continue.  Businesses contend that state corporate income taxes do not pose as big of a burden on them as other state and local taxes, such as personal property taxes and sales taxes levied on business inputs.  Yet, the costs are far too great for most states to even contemplate changing those taxes.  As a result, state corporate income taxes may remain on the chopping block for a while longer.

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