Taxes on Business Income in Rhode Island
Rhode Island imposes tax on corporations, based upon either taxable net income, capital stock or a minimum rate. 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 Rhode Island,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 Rhode Island) and foreign corporations (corporations organized in a state other than Rhode Island) are subject to a Rhode Island income tax. This tax is the greater of the following:
- 9 percent of net income or
- a franchise tax on capital stock of $2.50 for each $10,000, or
- a minimum tax of $500.
This tax can be reduced with various qualified credits.
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. Rhode Island 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 Rhode Island taxable adjusted gross income their distributive share of partnership income.
LLC Taxation Depends Upon Federal Tax Status
Rhode Island law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Rhode Island are classified as either partnerships or corporations for Rhode Island 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 Rhode Island 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 Rhode Island tax purposes