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Taxes on Business Income in North Carolina

Filed under State Taxes. Fact checked on February 13, 2013.

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North Carolina a corporate income tax of 6.9 percent of taxable income attributable to North Carolina. If you operate your business as a sole proprietorship or via a pass-through entity, you must report your business income on your personal tax return.

In North Carolina, 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

All C corporations are required to pay an annual corporate tax on its income allocable to the state of North Carolina. The tax rate is 6.9 percent.

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 level 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. North Carolina extends this favorable tax treatment to S corporations. The income your S corporation makes will not be subject to a corporate level income tax.

Partnership Income Passes Through to Shareholders

If you operate your business as a partnership, there is no tax assessed on partnership income. Instead, partners must include their share of partnership income on their North Carolina personal income tax returns.

LLC Taxation Follows Federal Election

North Carolina law recognizes businesses operating as limited liability companies (LLCs. The state treats an LLC exactly like a partnership for tax purposes if the IRS classifies the LLC as a partnership for federal income tax purposes. Accordingly, no income tax will be due on your LLC's net income. If the LLC has elected to be taxed as a corporation for federal tax purposes, it is taxed as a corporation in North Carolina.

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