Income Taxes on Business Income in Indiana

April 13, 2006

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In Indiana, you're generally free to choose to operate your business as a C corporation, subchapter 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. Beginning January 1, 2003, the Indiana corporate adjusted gross income tax rate is 8.5 percent.

S corporations. 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.

Indiana extends this favorable tax treatment to S corporations. The income your S corporation makes will not be subject to a corporate level income tax. However, your corporation has to withhold tax on amounts paid to nonresidents.

Partnerships. If you operate your business as a partnership, there is no tax assessed on partnership income on the partnership level. Instead, partners must include their share of partnership income in their Indiana personal income tax returns.

Limited liability companies. Indiana law recognizes businesses operating as limited liability companies (LLCs). The state treats an LLC exactly like a partnership for tax purposes if the IRS classifies the LLC as a partnership for federal income tax purposes. Accordingly, no income tax will be due on your LLC's net income at the entity level.