A recent report published by the Center on Budget and Policy Priorities recommends states reform their tax treatment of S Corporations and Limited Liability Companies to help states finance public services and alleviate their budget deficits.
Summary of Report
The arguments or positions raised in the report are that businesses organized as S Corporations and Limited Liability Companies generate roughly one-fourth of all business receipts. Yet 19 states impose only nominal taxes on those entities.
The report recommends those 19 states should consider imposing "meaningful" levies on S Corporations and Limited Liability Companies as a source of additional revenue to help alleviate the large budget deficits the states are experiencing.
Another point the report makes, is that in the states that do impose significant taxes or levies on S Corps and LLCs, a large majority of those states (31 states) treat LLCs more favorably than S Corps. Therefore, the report recommends those states should consider reforming their tax laws to tax each type of entity more equitably.
NOTE: if you are familiar with the state taxation of pass-through entities (S Corporations, LLCs), then you know that several states such as California, Illinois, Texas, New Hampshire, Tennessee, Michigan, Ohio, Washington and the District of Columbia (to name a few), impose significant taxes on pass-through entities. Some of these states treat pass-through entities the same as C corporations.
Conclusion
In summary, I think the report is very interesting and the recommendations made by the report may be worth considering by the states.
However, often multiple pass-through entities are created for legal protection or asset protection reasons, and can result in a tiered group of S corporations or LLCs. Some states tax every LLC, whether it is a LLC or a single-member LLC. The same occurs with S corporations and Q-subs.
Overall, the taxing structure in many states imposed on pass-through entities with entity level taxes and non-resident withholding requirements, are already burdensome enough. If the states make their taxing structures more "meaningful" on pass-through entities, would more businesses choose to be C corporations?
Click on the following link for access to the report:
http://www.cbpp.org/cms/index.cfm?fa=view&id=2771
