Taxes on Business Income in Minnesota
Minnesota has a corporate income tax, that is composed of an flat tax of 9.8 percent., Minnesota also imposes an entity level tax on corporations, S corporations, partnerships, and limited liability companies based upon the sum of property, payroll, and sales or receipts.
In Minnesota, 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 Minnesota) and foreign corporations (corporations organized in a state other than Minnesota) are subject to a Minnesota income tax. The corporate income tax (also referred to as the Minnesota franchise tax) is computed at 9.8 percent of net income plus an alternative minimum tax on income of $40,000 or more. They must also pay the composite tax.
All Business Entities Subject to Composite Tax
All entities doing business in Minnesota must pay a tax if the sum of Minnesota-sourced property, payroll, and sales or receipts exceeds $500,000. So, although S corporations, partnerships and LLCs are not subject to the Minnesota corporate income tax, they are subject to the additional composite tax. (There is an exception to this rule for farming partnerships.)
|Sum of Property, Payroll, and Sales or Receipts ||Amount of Tax |
|Less than $500,000 ||$0 |
|At least $500,000, but less than $1 million ||$100 |
|At least $1 million, but less than $5 million ||$300 |
|At least $5 million, but less than $10 million ||$1,000 |
|At least $10 million, but less than $20 million ||$2,000 |
|$20 million or more ||$5,000 |
S Corporation Income Passes Through to Shareholders
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 federal corporate 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. Minnesota extends this favorable tax treatment to the state corporate income tax liability. Thus, S corporations are not subject to the corporate income tax, although it may be liable for the composite tax.
Partnership Income Passes Through to Partners
If you operate your business as a partnership, your partnership will not be taxed on its net income, although it may be liable for the composite tax. Instead, partners must include in their Minnesota taxable adjusted gross income their distributive share of partnership income.
LLC Taxation Follows Federal Election
Minnesota law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Minnesota are classified as either partnerships or corporations for Minnesota tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership then it will not be taxed on its net income, but will be subject to the compositel tax in the chart above. Also, LLC members must include in their Minnesota taxable adjusted gross income their distributive share of LLC income.
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 Minnesota tax purposes.