Businesses must file federal and state income tax returns. We touch on some important issues for the most common business structures.
For federal tax purposes, the sole proprietor reports income and expenses from the business on Schedule C or Schedule C-EZ (Form 1040) and any related forms and schedules. The net income or loss from the business is then transferred to the proprietor’s individual Form 1040. The sole proprietor uses Schedule SE (Form 1040) to report net self-employment income for purposes of computing the Social Security and Medicare self-employment tax.
There is no separate form for reporting sole proprietorship income on the Minnesota tax return. To compute Minnesota income tax, the proprietor uses Form M1, the individual income tax return form. A copy of the federal Form 1040, including a copy of Schedule C or Schedule C-EZ and other supporting schedules, must be attached to the Minnesota return.
For federal tax purposes, the partnership files Form 1065, which is an information return. No tax is paid by the partnership with this return. Other forms and schedules may be required, including Schedules K and K-1. Individual partners use Schedule E (Form 1040), which is prepared using information from their Schedule K-1 of Form 1065, to report their distributive share of partnership income, deductions, credits and losses on the individual Form 1040. Schedule SE (Form 1040) is used to compute Social Security and Medicare self-employment tax.
A married couple who jointly operate an unincorporated business and who file a joint federal income tax return can elect not to be treated as a partnership for federal tax purposes provided that the husband and wife are the only members of the joint venture and that both husband and wife materially participate in the running of the business. Get more tax information from the IRS, Married Couples in Business at https://www.irs.gov/businesses/small-businesses-self-employed/married-couples-in-business.
For state tax purposes, the partnership completes Form M3, Partnership Return and files it with the Department of Revenue along with a copy of federal Form 1065 and Schedules K and K-1. The partnership may also have to pay a minimum fee based on property, payroll, and sales attributable to Minnesota. If the partnership has items of income, credits or modifications that are different from its federal return, the partnership should also issue and file Schedule KPI and/or Schedule KPC. If the partnership has nonresident individual partners it may file a composite income tax on their behalf using Schedule KC. If it has nonresident individual partners who will not be included in such composite income tax, generally the partnership is required to withhold income tax on behalf of such partners and remit it with its Minnesota partnership return, by using Schedule MW-3NR. Individual partners who are not included on the composite income tax also complete Form M1, the individual income tax return.
For federal tax purposes, the C corporation reports its income, deductions and credits, and computes its tax on Form 1120 or Form 1120-A. Supporting forms and schedules may be required. If the corporation issues dividends, it must annually send its shareholders Form 1099-DIV, stating the amount of dividends paid. A copy of Form 1099-DIV also is filed with the Internal Revenue Service. Shareholders report dividends received from the corporation on their individual Form 1040.
The C corporation determines its state tax on Form M4, Corporation Franchise Tax return. The corporation also may have to pay a minimum fee based on property, payroll, and sales attributable to Minnesota.
For federal tax purposes, the S corporation generally is not separately taxed. The S corporation files Form 1120S and supporting forms and schedules, including Schedules K and K-1 (Form 1120S). Individual shareholders report their share of the S corporation’s income, deductions, and credits on their individual Form 1040, using information contained on the Schedule K-1.
S corporations file Minnesota Form M8 Corporation Return, with the state, along with copies of federal Form 1120S and supporting forms and schedules. In addition, the S corporation may have to pay a minimum fee based on property, payroll, and sales attributable to Minnesota. If the S corporation has items of income, credits or modifications that are different from the federal return it should also issue and file Schedule KS. If the S corporation has nonresident individual shareholders it may file a composite income tax on their behalf using Schedule KC. If it has nonresident individual shareholders who will not be included on such a Schedule, generally the S corporation is required to withhold income tax on behalf of such shareholders and remit it with the Minnesota S corporation return by using Schedule MW-3NR. Individual shareholders who are not included on the Schedule KC must also complete Form M1, the individual income tax return.
Limited Liability Company
Under Treasury Regulations the organizers of a limited liability company can choose how the limited liability company will be taxed. Generally speaking an LLC with one member may be taxed either as a corporation or as a sole proprietorship. LLCs with two or more members may be taxed either as a partnership or as a corporation. Note that for one member LLCs, this decision will also impact whether the LLC needs a tax identification number. The Minnesota Department of Revenue has indicated that a Minnesota limited liability company will receive the tax treatment for state purposes that it receives for federal purposes. Persons considering forming a limited liability company are advised to consult with a tax professional regarding the state and federal tax treatment of such an entity.
Non-Minnesota Business Doing Business in Minnesota
Non-Minnesota businesses that do business in Minnesota or own property in here may be subject to taxation by the state if they have sufficient “nexus“ or connection with Minnesota to justify imposition of Minnesota tax laws. Activities that create nexus include but are not limited to:
- Having a place of business in Minnesota
- Having employees or independent contractors conducting business in Minnesota
- Owning or leasing real property, or tangible personal property, in Minnesota
- Obtaining or regularly soliciting business from within Minnesota.
Obtaining or soliciting business within Minnesota includes activities like selling products or services to customers in Minnesota who receive the product or service in Minnesota; engaging in transactions with customers in Minnesota that involve intangible property and result in income; leasing tangible personal property in Minnesota; and selling or leasing real property located in Minnesota. Methods of regularly soliciting business in Minnesota include direct mail and phone solicitation, and various forms of advertising, including print publications and radio and television.
This issue can be complicated to resolve. Further information on the nexus standards and exceptions, and other requirements for non-Minnesota businesses may be obtained from the Department of Revenue.