Taxes on business income in Montana

Montana imposes a corporate income tax on business income. Although this tax is labeled as a "corporate license tax," it based on corporate taxable net income attributable to Montana. If you operate your business as a sole proprietorship or via a pass-through, you must report you business income on your personal tax return.

In Montana, 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.

C corporations are subject to corporate license tax

Domestic corporations (corporations organized in Montana) and foreign corporations (corporations organized in a state other than Montana) are subject to a Corporation License (Income) Tax. The tax rate is 6.75 percent of taxable net Montana income. There's a minimum tax of $50.

If your corporation derives income from both within and without Montana and your sales volume in Montana does not exceed $100,000, you may elect to pay an alternative tax of 0.5 percent of Montana gross sales. Your corporation's activity in Montana must consist only of making sales and you cannot own or rent property in order to be eligible for this alternative tax.

Corporations electing and qualifying as small business corporations pay a minimum fee of $10. The $50 minimum corporation license tax is not applicable to electing small business corporations.

Corporations deriving income from Montana sources, but not subject to the license tax because they are not engaged in business in Montana, are subject to the complementary corporation income tax, which is reported on the same form (CLT-4) as the license tax.

S corporation income passes through to shareholders

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 federal 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. Montana extends this favorable tax treatment to state corporate income tax liability. Thus, S corporations will not be subject to the corporate income tax, but must pay a $10 minimum fee.

Partnership income passes through to partners

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

LLCs are taxed based on federal election

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