Taxes on Business Income in West Virginia
West Virginia imposes a corporate income tax. This tax is based upon corporate taxable net income attributable to West Virginia. If you operate your business as a sole proprietorship or via a pass-through entity, you must report your business income on your personal income tax return.
In West 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.
C Corporations Are Subject to Corporate Income Tax
Domestic corporations (corporations organized in West Virginia) and foreign corporations (corporations organized in a state other than West Virginia) are subject to a West Virginia income tax. West Virginia is in the process of phasing down its corporate income tax. For 2009 through 2011, the tax rate was 8.5 percent. The rate dropped in 2012 to 7.75 percent, and drops again in 2013 to 7.0 percent, and finally to 6.5 percent for periods beginning after 2013.
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. West Virginia 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 West Virginia taxable adjusted gross income their distributive share of partnership income.
LLC Taxation Follows Federal Election
West Virginia law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in West Virginia are classified as either partnerships or corporations for West Virginia 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 West 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 West Virginia tax purposes.