Taxes on Business Income in Pennsylvania
Pennsylvania imposes a corporate income computed the rate of 9.99 percent of corporate taxable net income attributable to Pennsylvania. 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 Pennsylvania,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 Must Pay Corporate Income Tax
If you are a domestic corporation (a corporation organized in Pennsylvania) or a foreign corporation (a corporation organized in a state other than Pennsylvania) in Pennsylvania, an annual excise tax measured by net income is imposed. This tax is for the privilege of doing business, carrying on activities, having capital or property employed or used, or owning property in Pennsylvania. The tax is imposed at the rate of 9.99 percent of taxable income. Check with your local city because qualified cities in Pennsylvania are authorized to impose a tax on persons engaging in any business within the city.
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 IRS 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. Pennsylvania extends this favorable tax treatment to state corporate income tax liability. Thus, S corporations will not be subject to the corporate income tax.
However, S corporations are subject to the 9.99 percent corporate net income tax to the extent of built-in-gains.
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 Pennsylvania taxable adjusted gross income their distributive share of partnership income.
LLCs May Elect S Corporation Status
Pennsylvania law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Pennsylvania are classified as corporations for Pennsylvania tax purposes, but you may elect to be treated as an S corporation for pass-through tax treatment. In such cases, personal income tax is not imposed at the LLC entity level, but you as an LLC member will be subject to tax on your share of the income or loss of the LLC for its tax year.
S corporations (and LLCs that have elected to be treated as S corporations) are subject to Pennsylvania's entity-level capital stock and franchise taxes. Regardless of whether there is a tax liability, those entities must file a Pennsylvania Corporate Tax Report using for PA RCT-101.