Taxes on Business Income in Massachusetts
Massachusetts imposes a corporate income tax on business income based upon corporate taxable net income attributable to Massachusetts. If you operate your business as a sole proprietorship or via a pass-through entities, you must report your business income on your personal tax return.
In Massachusetts, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship.. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
C Corporations Are Subject to Corporate Income Tax
Domestic corporations (corporations organized in Massachusetts) and foreign corporations (corporations organized in a state other than Massachusetts) must pay an annual excise tax (in lieu of the more common "corporate income" tax), calculated in part on net income and part on property valuation.
For the 2012 tax year, the income portion of the corporate excise tax is imposed at the rate of 8.0 percent of net income allocated to Massachusetts. (The net income tax rate was to 8.25 percent in 2011.) The property portion of the tax is imposed at the rate of $2.60 per $1,000 of value subject to tax (taxable tangible property or taxable net worth). These rates include a surtax of 14% of the taxes imposed. The minimum excise tax payable annually is $456.
Total Receipts Determine S Corporation Taxation
If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any corporate level federal income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business. In Massachusetts you are generally subject to tax under the same general rules as under the federal rules.
Massachusetts imposes an entity-level tax on higher-income S corporations. The rate is 3.0 percent if net income is between $6 and $9 million; 4.5 percent on the total taxable net income of any S corporation with receipts of $9 million or more.
Also, S corporations are subject to the tangible property or net worth portion of the tax and to the $456 minimum excise in the same manner as any other corporation subject to the corporate excise.
Partnership Income Is Passed Through to Partners
If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Massachusetts taxable adjusted gross income their distributive share of partnership income.
Taxation of LLCs Is Based on Federal Election
Massachusetts law recognizes businesses operating as limited liability companies (LLCs). Massachusetts will honor whatever tax status is in effect for federal income tax. A LLC that is taxed as a partnership for federal tax purposes will be taxes as partnerships for Massachusetts tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Massachusetts taxable adjusted gross income their distributive share of LLC income. However, if a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Massachusetts tax purposes.