Taxes on Business Income in North Dakota

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

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North Dakota imposes an corporate income tax. This tax ranges from 1.68 percent to 5.15 percent on the taxable income attributable to North Dakota. However, if all your North Dakota income is from sales and these sales total less than $100,000, you may be able to pay a lower gross receipts tax. If you operate your business as a sole proprietorship or via a pass-through entity, then you must report your busines income on your personal tax return.

In North Dakota, 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 Tax

Domestic corporations (corporations organized in North Dakota) and foreign corporations (corporations organized in a state other than North Dakota) are subject to a North Dakota income tax.

The marginal tax rates apply as follows:

Taxable Net Income Marginal Tax Rate
First $25,000 1.68 percent
Over $25,000 but not over $50,000 4.23 percent
Over $50,000 5.15 percent

If a corporation elects to use the water's edge method to apportion its income, the corporation will be subject to an additional 3.5% surtax on its North Dakota taxable income.

S Corporation Income Passes Through to Shareholders

If you meet the federal tax law requirements to operate as an 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 Dakota extends this favorable tax treatment to state corporate income tax liability, and S corporations will not be subject to the corporate income 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. Instead, partners must include in their North Dakota taxable adjusted gross income their distributive share of partnership income.

LLCs Are Taxed Based Upon Federal Election

North Dakota law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in North Dakota are classified as either partnerships or corporations for North Dakota tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership on the federal level, then it will not be taxed on its net income. Instead, members must include in their North Dakota 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 North Dakota tax purposes.

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