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Taxes on Business Income in Oklahoma

Filed under State Taxes. Fact checked on May 24, 2012.

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Oklahoma imposes a 6 percent corporate income tax based upon corporate taxable net income attributable to Oklahoma. 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 Oklahoma, 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.

Corporations Are Subject to Corporate Income Tax

Domestic corporations (corporations organized in Oklahoma) and foreign corporations (corporations organized in a state other than Oklahoma) are subject to an Oklahoma income tax. The tax is computed at 6 percent of Oklahoma taxable income.

S Corporation Income Passes Through to Shareholders

If you meet the federal tax law requirements to operate as an S corporation, the federal tax code 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. Oklahoma 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 Partnership

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Oklahoma taxable adjusted gross income their distributive share of partnership income.

LLC Are Taxed Based on Federal Election

Oklahoma law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Oklahoma are classified as either partnerships or corporations for Oklahoma 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 Oklahoma 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 Oklahoma tax purposes.

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