Income Taxes on Business Income in Tennessee

April 13, 2006

	Visited: 90
	Not rated
	Rate:

In Tennessee, 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 Tennessee) and foreign corporations (corporations organized in a state other than Tennessee) are subject to a Tennessee income tax. The regular corporate income tax is computed at 6.5 percent of net earnings.

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 Tennessee, the law does not extend this favorable tax treatment to state corporate income tax liability. In Tennessee your S corporation will be subject to the same taxes as a regular corporation. Also, the dividends that are distributed out of your S corporation will be taxable to you individually as dividend 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 Tennessee taxable adjusted gross income their distributive share of partnership income that is taxable on the personal income tax level.

Limited liability companies (LLCs). Tennessee law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Tennessee are classified as either partnerships or corporations for Tennessee 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 Tennessee 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 Tennessee tax purposes.