Income Taxes on Business Income in Massachusetts

April 13, 2006

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In Massachusetts, 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. Domestic corporations (corporations organized in Massachusetts) and foreign corporations (corporations organized in a state other than Massachusetts) must pay an annual excise tax (corporation income tax). This excise tax is the greater of $456 or the sum of $2.60 per $1,000 of the value of qualified taxable tangible property or qualified taxable net worth plus 9.5 percent of taxable net income (minimum $456).

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.

In Massachusetts you are generally subject to tax under the same general rules as under the federal rules. However, if your S corporation has total receipts of more than $6 million, the corporation will have to pay tax on the net income. If the receipts are more than $6 million, but less than $9 million, the tax rate is 3 percent of net income. If the receipts are more than $9 million the tax rate is 4.5 percent of net income.

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

Limited liability companies (LLCs). Massachusetts law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Massachusetts are classified as partnerships for Massachusetts tax purposes. Accordingly, your LLC will not be taxed on its net income. Instead, members must include in their Massachusetts 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 Massachusetts tax purposes.