Taxes on Business Income in Virginia
Income tax on business income computed at 6 percent based upon Virginia taxable net income is required in required for corporations. 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 Virginia, 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.
Corporation Are Subject to Corporate Income Tax
Domestic corporations (corporations organized in Virginia) and foreign corporations (corporations organized in a state other than Virginia) are subject to a Virginia income tax. The corporate income tax rate is 6 percent of Virginia taxable income on the state level. In addition, qualified areas in Virginia are authorized to levy a local income tax, so be sure to check with your local government.
Pass-through Entities Must File Information Returns
All pass-through entities must file an income tax return in order to report withholding on foreign partners, members or shareholders. There is generally no tax imposed at that entity level.
S Corporation Income Passes Through to Shareholders
If you meet the federal tax law requirements to operate as an S corporation, the Internal Revenue 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. Virginia extends this favorable tax treatment to state corporate income tax liability and S corporations are not 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 Virginia taxable adjusted gross income their distributive share of partnership income.
LLCs Are Taxed Based on Federal Election
Virginia law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Virginia are classified as partnerships for Virginia tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Virginia 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 Virginia tax purposes.