Corporate Income Taxes

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The corporate income tax is levied on business profits of incorporated businesses. Many US businesses, including sole proprietorships, partnerships, and certain eligible corporations, are not subject to the corporate income tax. Instead, their owners must include an allocated share of the businesses’ profits in their taxable income under the individual income tax.

Forty-four states and the District of Columbia levy a corporate income tax. Four states, Ohio, Nevada, Texas, and Washington, tax corporations’ gross receipts instead of income. South Dakota and Wyoming had no corporate income tax or gross receipts tax in 2018.

How much revenue do state and local governments raise from corporate income taxes?

State and local governments collected a combined $57 billion in revenue from corporate income taxes in 2015, or only 2 percent of general revenue. That was a far smaller share than came from sales taxes, property taxes, and individual income taxes.

State governments collected $49 billion in revenue (3 percent of state general revenue) from corporate income taxes in 2015. Local governments collected only $9 billion in revenue (1 percent of local government general revenue) because just seven states allow local governments to levy the tax.

State and Local Corporate Income Tax Revenue, 2015

 

Revenue ($ billions)

Percentage of general revenue

States and local government

$57

2

States

$49

3

Local governments

$9

1

New Hampshire’s corporate income tax provided 5 percent of its state and local general revenue, the most of any state. Delaware and New York were the only other states where the tax provided at least 4 percent of general revenue. In New York, local corporate income taxes raised more revenue ($7.1 billion) than its state tax ($5.1 billion). Local corporate taxes brought in less than $500 million in the six other states that allowed them.

Data: View and download each state's general revenue by source as a percentage of general revenue

Among the 44 states with broad corporate income taxes, the tax accounted for less than 2 percent of state and local general revenue in 28 states. Ohio and South Dakota do not have a broad-based tax but had corporate income tax revenue because they both have special taxes for financial institutions. Nevada, Texas, Washington, and Wyoming had no corporate income tax revenue in 2015.

How much do corporate income tax rates differ across states?

In 2018, top corporate income tax rates range from 3 percent in North  Carolina to 12 percent in Iowa.

Data: View and download each state's top corporate income tax rate

In addition to North Carolina, nine other states (Arizona, Colorado, Florida, Kansas, Mississippi, New Mexico, North Dakota, South Carolina, and Utah) had top rates lower than 6 percent. In contrast, Alaska, Illinois, Iowa, Minnesota, New Jersey, and Pennsylvania had top rates of 9 percent or higher. In the District of Columbia the rate fell from 9.0 percent to 8.25 percent starting in 2018, while in Illinois the rate increased from 7.75 percent to 9.5 percent.

How do multistate corporations pay state corporate income taxes?

Most states use the federal definition of corporate income as a starting point. However, states deviate from federal rules in some instances. For example, many states did not enact conforming rules when the federal government enacted “bonus depreciation” in 2008, which allowed businesses to deduct a larger portion of capital investment in the year the investment is first made. Many states will again have to decide if they want to conform or decouple from several of the corporate income tax provisions in the recently passed Tax Cuts and Jobs Act (TCJA).

Although states benefit from federal tax administration and enforcement by following the federal definition of corporate income, they must take additional steps for multistate corporations to determine what portion of that income is taxable in their states.

States must first establish whether a company has “nexus” in the state—that is, enough physical or economic presence to owe income tax. Next, they must determine the taxable income generated by activities in the state. For example, multistate companies often have subsidiaries in no-tax or low-tax states that hold intangible assets, such as patents and trademarks. The rent or royalty payments to those wholly owned subsidiaries may or may not be considered income of the parent company operating in another state. Finally, states must determine how much of a corporation’s taxable income is properly attributed to that state.

Until recently, most states used a three-factor formula based on the Uniform Division of Income for Tax Purposes Act to determine the portion of corporate income taxable in the state. That formula gave equal weight to the shares of a corporation’s payroll, property, and sales in the state. In the past 20 years, however, states have moved toward formulas that weight more heavily or rely exclusively on sales within the state to apportion income (see each state’s formula in this table). By using the portion of a corporation’s sales rather than employment or property to determine tax liability, states hope to encourage companies to relocate or to expand their production operations within the states they operate in.

How do states treat net operating losses?

The TCJA limited the deduction for net operating losses (NOLs) to 80 percent of taxable income. States that conform with federal rules will need to decide whether to adopt this limit or decouple and create their own rules.

Under prior federal tax law, corporations could carry back net NOLs for two years or carry them forward for up to 20 years. Thus, taxpayers who generated losses in 2016 could amend their 2014 and 2015 tax returns, reducing their tax liability for those years, or carry forward the losses to reduce their liability in future years.

The carry-back treatment of NOLs varies among the states that have a corporate income tax. Fourteen states allow a two-year carry-back, like federal rules, and three states (Louisiana, Montana, and Utah) allow a three-year carry-back. Twenty-seven states and District of Columbia do not allow any carry-backs.

The TCJA eliminated the carry-back provision, so states that allow loss carry-backs will need to decide if they want to keep the rule without administration assistance from the federal government.

The new federal law allows corporations to carry forward net operating losses indefinitely. The length of NOL carry-forward periods in the states currently ranges from five years in Arkansas and Rhode Island to 20 years in 30 states and DC. Some states occasionally suspend or limit NOL deductions to raise revenue. California suspended the deduction for NOLs from 2008 to 2011, adding years to the carry-forward period to make up for the suspension. Since the Great Recession, several states have changed their treatment of NOLs; most of those changes have been to extend the number of carry-forward years to conform to the federal rules. States will need to decide whether to now conform with the indefinite federal carry forward period.

Further reading

State Corporate Income Tax: Treatment of Net Operating Losses
Tax Policy Center

Business Franchise Taxes in the District of Columbia
Norton Francis (2013)

Note

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections.  All dates in sections about revenue reference the fiscal year unless stated otherwise.

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