Most states impose taxes on at least some forms of business income earned within their borders. In general, the specifics of how a certain business’s income is taxed rely in part on the legal structure of the business. Most states have a corporate income tax that applies to businesses, while a state’s personal income tax applies to pass-through entities like S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships. States have a wide range of tax rates on both personal and corporate income. The typical range of corporate rates, which are typically flat regardless of income, is between 4% and 10%. In some states, personal rates, which are typically based on the amount of income, can range from 0% (for low amounts of taxable income) to 9% or higher.
Currently, there are six states without a corporate income tax: Wyoming, South Dakota, Texas, Wyoming, South Dakota, and Nevada. Four of the states, namely Nevada, Ohio, Texas, and Washington, do impose a corporate gross receipts tax of some kind. Aside from Alaska, Florida, and Tennessee, five of those states—Nevada, South Dakota, Texas, Washington, and Wyoming—as well as the District of Columbia do not currently have a personal income tax. In New Hampshire, only dividend and interest income are subject to taxation.
Many states impose a second tax on at least some firms, frequently referred to as a “franchise tax” or “privilege tax,” in addition to taxing business profits through a corporate income tax or a personal income tax. This is frequently defended as a tax that is necessary for the state to allow businesses to operate there. The specifics of a state’s franchise tax may depend in part on the legal structure of the business, just like with state taxes on corporate income. Franchise taxes are often either a set amount or a percentage of a company’s net worth.
New York has one of the most complicated business tax schemes in the country. Certain rules are not covered here. If you can’t find clear answers to your questions on the Department of Taxation and Finance website, you should talk to a professional New York consultant for more understanding. In this article, Eastcoastlaws.com will outline all you need to know about New York State Business Income Tax.
Does New York have a business tax?
Yes, New York has an income business tax system that requires companies doing business in the state to pay tax on their income earned within the state. The tax is based on the company’s net income and is calculated using New York’s tax laws and regulations. The tax rate can vary depending on the type of business and its net income.
What is New York business income tax?
New York Business Income Tax is a tax imposed on companies doing business in the state of New York. The tax is based on the company’s net income earned within the state and is calculated using the state’s tax laws and regulations. The tax rate can vary depending on the type of business and its net income.
How New York State Business Income Tax Works
New York has a corporation franchise tax, which applies to both traditional (C-type) corporations and to S corporations, and a tax known simply as the “filing fee,” which applies to LLCs, limited liability partnerships (LLPs), and some regular partnerships. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal New York tax return.
For traditional corporations, the amount of corporation franchise tax due is the highest of the following three tax bases:
- the corporation’s business income base
- the corporation’s business capital base, or
- a fixed dollar minimum (FDM) tax.
Here’s a quick look at each of these three items.
The business income base is based on federal taxable income with certain New York-specific modifications. The default tax rate is 6.5%. However, a lower rate of 4.875% applies to qualified emerging technology companies (QETCs) and a 0.0% rate applies to qualified New York manufacturers. General business taxpayers with a business income base of more than $5 million pay 7.25%.
The business capital base is the total investment and business capital allocated to New York State after deducting short-term and long-term liabilities attributable to assets. It currently is taxed at a rate of 0.1875%–with a 0% rate for qualified New York manufacturers and QETCs, and qualified cooperative housing corporations. All of these rates are subject to change in the coming years. The tax is capped at $350,000 for qualified New York manufacturers and QETCs, and $5 million for all other taxpayers.
The fixed dollar minimum (FDM) tax is based on a corporation’s New York State receipts. New York manufacturers and QETCs have a separate tax table. So do non-captive REITs (Real Estate Investment Trusts) and non-captive RICs (Regulated Investment Companies).
As of 2022, the tax table for most corporations is as follows:
- receipts not more than $100,000 = $25
- receipts more than $100,000 but not over $250,000 = $75
- receipts more than $250,000 but not over $500,000 = $175
- receipts more than $500,000 but not over $1,000,000 = $500
- receipts more than $1,000,000 but not over $5,000,000 = $1,500
- receipts more than $5,000,000 but not over $25,000,000 = $3,500
- receipts more than $25,000,000 but not over $50,000,000 = $5,000
- receipts more than $50,000,000 but not over $100,000,000 = $10,000
- receipts more than $100,000,000 but not over $250,000,000 = $20,000
- receipts more than $250,000,000 but not over $500,000,000 = $50,000
- receipts more than $500,000,000 but not over $1,000,000,000 = $100,000; and
- receipts over $1,000,000,000 = $200,000.
As of 2022, the tax table for New York manufacturers and QETCs is as follows:
- receipts not more than $100,000 = $19
- receipts more than $100,000 but not over $250,000 = $56
- receipts more than $250,000 but not over $500,000 = $131
- receipts more than $500,000 but not over $1,000,000 = $375
- receipts more than $1,000,000 but not over $5,000,000 = $1,225
- receipts more than $5,000,000 but not over $25,000,000 = $2,625; and
- receipts over $25,000,000 = $3,750.
Additional FMD rules, not covered here, apply to non-New York corporations.
Corporations may also be subject to the metropolitan transportation business tax (MTA surcharge), which applies to corporations that do business, employ capital, own or lease property, maintain an office, or derive receipts from activity, in the Metropolitan Commuter Transportation District, which covers New York City and nearby areas. This tax doesn’t apply to New York S corporations.
For New York S corporations, the corporation franchise tax generally is based on the fixed dollar minimum (FDM) tax as described above (a tax on the S corporation’s New York receipts). New York manufacturers and QETCs have a separate tax table.
As of 2022, the tax table for most S corporations is as follows:
- receipts not more than $100,000 = $25
- receipts more than $100,000 but not over $250,000 = $50
- receipts more than $250,000 but not over $500,000 = $175
- receipts more than $500,000 but not over $1,000,000 = $300
- receipts more than $1,000,000 but not over $5,000,000 = $1,000
- receipts more than $5,000,000 but not over $25,000,000 = $3,000; and
- receipts over $25,000,000 = $4,500.
As of 2022, the tax table for S corporations that are also eligible qualified New York manufacturers or QETCs is as follows:
- receipts not more than $100,000 = $19
- receipts more than $100,000 but not over $250,000 = $56
- receipts more than $250,000 but not over $500,000 = $131
- receipts more than $500,000 but not over $1,000,000 = $375
- receipts more than $1,000,000 but not over $5,000,000 = $1,225
- receipts more than $5,000,000 but not over $25,000,000 = $2,625; and
- receipts over $25,000,000 = $3,750.
Also, additional rules not covered here apply to non-New York S corporations.
New York LLCs and LLPs are required to pay the state filing fee; the fee is based on a business’s New York gross income. For 2022, the tax table is as follows:
- gross income not more than $100,000 = $25
- gross income more than $100,000 but not over $250,000 = $50
- gross income more than $250,000 but not over $500,000 = $175
- gross income more than $500,000 but not over $1,000,000 = $500
- gross income more than $1,000,000 but not over $5,000,000 = $1,500
- gross income more than $5,000,000 but not over $25,000,000 = $3,000; and
- gross income over $25,000,000 = $4,500.
A regular New York partnership is only subject to the state filing fee if it has $1 million or more in gross income. For 2022, the tax table is as follows:
- gross income of $1,000,000 = $500
- gross income more than $1,000,000 but not over $5,000,000 = $1,500
- gross income more than $5,000,000 but not over $25,000,000 = $3,000; and
- gross income over $25,000,000 = $4,500.
For purposes of comparison, note that in recent years New York taxes personal income at marginal rates ranging from 4.00% to 8.82%.
New York City has its own business corporation tax – which is not covered here.
Let’s briefly look at additional details for five of the most common forms of New York business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.
Corporations
The corporate business tax, which is based on the highest of the corporation’s business income base, business capital base, or FDM, is levied against corporations in New York.
Example: The greatest tax owed by your New York firm for the current tax year is determined by its business income base, which for the tax year in question was $500,000. Your business is not a QETC or an authorized New York manufacturer. The Metropolitan Commuter Transportation District is not where it is situated either. In light of the above, the corporation will be required to pay $32,500 (6.5% of $500,000) in New York corporate franchise tax.
S Corporations
A typical corporation must first be established before electing S status by submitting a particular document to the IRS. An S corporation, unlike a standard corporation, is typically not liable to a separate federal income tax (exceptions include cases where the S corporation has built-in gains, excess passive income, or passive investment income). Instead, taxable revenue from an S corporation is passed through to the individual shareholders, and each shareholder must pay federal tax on the portion of the firm’s income that is attributable to him or her. S corporations are hence typically pass-through entities. (Note that a shareholder does not have to receive their share of the S corporation’s profits in order for them to be subject to tax on it.)
The federal S election, however, is not recognized in New York. Instead, you must additionally submit a New York election form along with the federal S election form. (If your company fails to file correctly with the State of New York for S status, the state will tax your company as though it were a typical corporation.) Additionally, based on New York receipts, New York S corporations must pay a corporate franchise tax. Each individual S corporation shareholder will also be required to pay tax on his or her part of the corporation’s net income, separate from any corporation franchise tax that may be owed by the company itself.
Limited Liability Companies (LLCs)
As pass-through corporations, LLCs are exempt from both federal and state income tax in many states. Instead, the business’s income is divided into specific LLC members, who are then responsible for paying both federal and state taxes on the amount received. The amount disbursed to individual LLC members in New York is subject to state income tax, but the LLC itself is also responsible for the state filing fee.
It should be noted that while LLCs are typically treated as partnerships for tax purposes (or disregarded entities for single-member LLCs), you can choose to have your LLC treated as a corporation instead. In that situation, New York’s corporation franchise tax would also apply to the LLC.
Partnerships
As pass-through organizations, partnerships are exempt from both federal and state income tax in many states. Instead, the business’s income is split among specific partners, who are then responsible for paying both federal and state taxes on it. The amount distributed to individual partners in New York is subject to state income tax, but a partnership with at least $1 million in New York gross income is also required to pay the state filing fee.
Example: Your New York partnership earned $300,000 in net income and $500,000 in gross income during the 2022 tax year. The partnership is exempt from paying the filing fee because its gross income was under $1 million. You and your colleague partners will split the $300,000 in net income, and you and your fellow partners will each be responsible for paying tax on your individual amounts on your state tax returns. Depending on your annual net income as a whole, the rate will change.
Sole Proprietorships
Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income.
Example: For the 2022 tax year, your sole proprietorship had a net income of $100,000. The $100,000 in net income is distributed to you personally, and you pay tax on that income on your individual state tax return; the rate will vary depending on your overall net income for the year.
How much tax does an LLC pay in New York?
LLCs in New York are subject to the following taxes:
- State income tax: LLCs are considered “pass-through” entities for tax purposes, which means that the business itself does not pay income tax. Instead, the income or loss from the LLC is passed through to the individual members, who report it on their personal income tax returns. In New York, LLCs are subject to the state’s corporate income tax rate of 6.5%.
- Sales tax: LLCs that engage in retail sales or other activities that involve the collection of sales tax must register with the New York State Department of Taxation and Finance and collect and remit sales tax to the state.
- Franchise tax: LLCs that do business in New York State are also subject to an annual franchise tax, which is based on the LLC’s net income or capital.
- Unincorporated business tax: Some New York City LLCs are subject to the city’s unincorporated business tax, which is based on the LLC’s net income.
- Property tax: LLCs that own property in New York State are subject to property tax, which is based on the value of the property.
It’s worth noting that the above taxes may vary depending on the county and city where your LLC operates. It’s always recommended to consult with a tax professional or accountant to understand what taxes apply to your LLC and how to file them.
