Appendix: States That Assess an Income Tax on the Flowthrough Entity

By Kathleen K. Wright, CPA, MBA, J.D., LL.M., and Jack Small, CPA, CMI

This appendix provides a summary of the entity-level tax payments assessed by selected states. It accompanies the State and Local Tax column, “Uncertain Tax Positions for Flowthrough Entities: What Is an Income Tax?” 42 The Tax Adviser 410 (June 2011).

California

S corporations, LLPs, LLCs, QSubs, SMLLCs all pay the minimum tax of $800. This tax is not subject to the Topic 740 analysis.

S corporations also pay an income tax imposed at the rate of 1.5% (3.5% for financial S corporations). The tax is the greater of the computed tax or $800. The S corporation pays the greater of the two. This tax is an income tax subject to the Topic 740 analysis. (CA Rev. & Tax. Code §23802)

The QSub pays an additional $800 minimum tax even though it combines with the parent S corporation. This tax is not subject to the Topic 740 analysis. (CA Rev. & Tax. Code §§23153(d)(1) and 23800.5(a)(1)(B))

LLCs and SMLLCs pay a fee based on gross receipts sourced to California as follows: $250,000 – $499,999 = $900; $500,000 – $999,999 = $2,500; $1,000,000 – $4,999,999 = $6,000; $5,000,000 and over = $11,790. This tax is not subject to the Topic 740 Analysis. (CA Rev. & Tax. Code §§17941(a) and 17942)

District of Columbia

The District of Columbia does not recognize S corporation elections. As a result, S corporations are subject to the district’s corporation franchise tax in the same manner as C corporations. The franchise tax is based on the S corporation’s net income and is imposed at a rate of 9.975%. This tax is subject to the Topic 740 analysis (DC Code §§47-1807.02 and 47-1801.04(16)).

Every unincorporated business doing business in the District that has gross income greater than $12,000 (regardless of whether it has net income) is subject to an income-based tax at the rate of 9.975% (DC Code §§47-1805.02(6), 47-1810.01, and 47-1808.03). Unincorporated businesses include partnerships, LLPs, and LLCs classified as partnerships (DC Code §§47-1808.01 and 29-1074). The tax on unincorporated businesses is a tax subject to the Topic 740 analysis.

Illinois

The personal property replacement income tax (which was enacted to replace the corporate personal property tax) is an additional income tax that is imposed on corporations, partnerships, S corporations (but not QSubs), and LLCs. The required additions and subtractions for replacement tax purposes are the same as the corporate income tax additions. This tax is an income tax subject to the Topic 740 analysis. (35 IL Comp. Stat. §§5/201(c), 5/201(d), and 5/205(b))

The QSub does not pay an entity-level tax measured by income or net worth/capital. (IL Admin. Code tit. 86, §100.9750)

Kentucky

For tax years beginning after January 1, 2007, C corporations, S corporations, LLPs, LLCs, and other limited liability passthrough entities with over $3 million in Kentucky gross receipts pay a limited liability entity tax (LLET) of $175. If gross receipts or gross profits are $6 million or more, the fee is the lesser of $.095 per $100 of gross receipts and $.75 per $100 gross profits. Taxpayers with gross receipts or gross profits over $3 million but less than $6 million may reduce the gross receipts or gross profits portion of the LLET by an amount equal to $2,850, or $22,500 in the case of the gross profits computation, multiplied by a fraction, the numerator of which is $6 million minus the amount of gross receipts or gross profits for the tax year and the denominator of which is $3 million. “Gross profits” is defined as sales minus COGS. The LLET is an income tax that is subject to the Topic 740 analysis. (KY Rev. Stat. Ann. §§141.010(24)(b), 141.010(26), 141.0401(2), 141.0401(2)(b)(1)(b), and 141.0401(2)(b)(2)(b))

The limited liability entity fee is not imposed on partnerships and QSubs. (KY Rev. Stat. Ann. §§141.010(24)(b), 141.010(26), 141.0401(2) (partnerships); KY Rev. Stat. Ann. §141.200(10)(c) (QSubs))

Massachusetts

S corporations pay the greater of $2.60 per $1,000 on taxable tangible property or net worth. If the S corporation has total annual receipts of $6 million or more, it is subject to an income tax of 3% of net income; if total receipts are $9 million or more, the tax is 4.5% of net income. QSubs are brought under this tax because they are taxed as part of the parent corporation. This is an income tax subject to the Topic 740 analysis. (MA Gen. Laws ch. 63, §§32, 32D, and 39)

Partnerships, LLPs, LLCs, and SMLLCs do not pay any entity-level tax. (MA Gen. Laws ch. 62, §17)

Michigan

S corporations, partnerships, LLPs, LLCs, QSubs, and SMLLCs all pay the Michigan business tax. Effective for tax years occurring after December 31, 2007, the MBT contains an income tax portion and a modified gross receipts tax portion. The business income tax is imposed at a rate of 4.95%. The modified gross receipts tax is imposed at a rate of 0.8%. In addition, there is an annual surcharge based on a percentage of the taxpayer’s MBT liability before credits. For all taxpayers other than financial institutions, the surcharge is 21.99%. The surcharge is capped at $6 million per year and will sunset after 2016, provided that Michigan personal income growth exceeds 0% in either 2014, 2015, or 2016. This is an income tax subject to the Topic 740 analysis. (MI Comp. Laws §§208.1201(1), 208.1203(1), 208.1281, and 208.1281(2))

New Hampshire

S corporations, partnerships, LLPs, LLCs, QSubs, and SMLLCs all pay the business profits tax and the business enterprise tax. The business profits tax rate is 8.5% of taxable business profits of business organizations, based on federal net income, before net operating losses and special deductions, adjusted by state additions and deductions. A business organization with gross receipts of $50,000 or less is not required to file a business profits tax return. For gross incomes over $150,000 or tax bases over $75,000, the business enterprise tax is imposed at the rate of 0.75% on the taxable enterprise value tax base of every business enterprise subject to tax. The enterprise value tax base is defined as the sum of all compensation paid or accrued, interest paid or accrued, and dividends paid by the business enterprise, before consideration of adjustments required to be made to the value tax base. The business profits tax is an income tax subject to the Topic 740 analysis. (NH Rev. Stat. Ann. §§77-A:2, 77-A:1(IV), 77-A:6, 77-E:2, and 77-E:1(IX))

Tennessee

S corporations, LLCs, LLPs, and SMLLCs are subject to the excise tax imposed at the rate of 6.5%. These entities are also subject to the franchise tax equal to $.025 for each $100 of net worth or actual value of tangible property, whichever is greater, but no less than $100. These entities are also subject to the Hall income tax, which is a tax on interest and dividend income exceeding $1,250 that can qualify as a credit against the excise tax liability (TN Code Ann. §§67-2-102, 67-4-2004(27), 67-4-2007, 67-4-2105, 67-4-2106, and 67-4-2119). The excise tax is an income tax that is subject to the Topic 740 analysis. The Hall income tax is not subject to this analysis. Partnerships are subject to the Hall income tax. (TN Code Ann. §67-2-102)

Texas

S corporations, partnerships, LLPs, LLCs, QSubs, and SMLLCs are subject to the revised Texas margin tax. The margin tax is imposed on entities with more than $1 million in total revenues at the rate of 1%, or 0.5% for entities primarily engaged in retail or wholesale trade. The tax is assessed on the lesser of 70% of total revenues or 100% of gross receipts after deductions for either compensation or COGS; it is subject to discounts for entities with gross receipts less than $1 million. For example, if gross receipts are $300,000–$399,999 the computed tax is reduced by 80%, so the entity pays 20% of the total tax. The tax is not assessed on an entity with gross receipts less than $300,000. At total gross receipts of $900,000 or more, the discount is 0%. The Texas margin tax is subject to the Topic 740 analysis. (TX Tax Code Ann. §§171.001(a)(1), 171.002, and 171.0021)

Wisconsin

S corporations pay the franchise tax, which is equal to 7.9% of the interest income attributable to the state, and the recycling surcharge is equal to the greater of $25 or 0.2% of the corporation’s net income attributable to the state, but not more than $9,800. The recycling surcharge is a tax on net income and is subject to the Topic 740 analysis. (WI Stat. §§71.23(2),77.93(1), 77.93(3), and 71.195)

Partnerships, LLPs, and LLCs pay the recycling fee described above. (WI Stat. §77.93(3))

QSubs and SMLLCs do not pay an entity-level tax measured by income or net worth. (WI Stat. §§71.34(2), 71.365(4), and 77.935)

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