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Taxes on Business Income in Vermont

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

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Vermont imposes a business income tax on all business entities based upon their Vermont income. This tax applies to S Corporations, partnerships and limited liability companies, as well as to regular corporations. If you operate your business as a sole proprietorship you must report your business income on your personal tax return.

In Vermont,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 Business Income Tax

Domestic corporations (corporations organized in Vermont) and foreign corporations (corporations organized in a state other than Vermont) are subject to a tax on their Vermont taxable income.

The regular corporate income tax is the greater of $250 ($75 for small farm corporations) or the following:

Taxable Net Income Tax
$0 to $10,000 6.0% (minimum tax $250)
$10,001 to $25,000 $600 plus 7.0% of excess over $10,000
$25,001 and over $1,650 plus 8.5% of excess over $25,000

S Corporations Are Subject to Business Income Tax

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

Vermont partially extends this favorable tax treatment to state corporate income tax liability, but subjects S corporations (and all other pass-through entities) to the Business Income Tax. The S corporation is liable for the minimum annual (entity) tax of $250. It is also obligated to make payments for nonresident shareholders for the income attributable to Vermont at the second lowest marginal rate. Each payment is a credit against the shareholder’s individual income tax liability.

Partnerships Are Subject to Business Income Tax

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

Partnerships are liable for the Business Income Tax, which is a minimum of $250. It is also obligated to make payments for nonresident partners for the income attributable to Vermont at the second lowest marginal rate. Each payment is a credit against the partner’s individual income tax liability.

LLCs Are Subject to Business Income Tax

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

Most LLC's are liable for the Business Income Tax, which is a minimum of $250 per year. There are two exceptions:

  • a single-member LLC which is disregarded for federal tax purposes, or
  • any LLC that has made an election to be taxed as a regular C corporation.

The LLC is also obligated to make payments for nonresident members for the income attributable to Vermont at the second lowest marginal rate. Each payment is a credit against the member’s individual income tax liability.

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