Series 22: 2.1.3. State Tax Treatment

2.1.3.  State Tax Treatment

State taxation of pass-through entities generally follows the lead of the federal government. However, some states have imposed taxes on pass-through entities other than an income tax. One such tax is the franchise tax, a tax giving businesses the right to be chartered or even just to operate in the state. The franchise tax is imposed on businesses that exceed a certain net income or capital threshold. Other states impose entity level taxes on LLCs for doing business in the state.

Some states have had difficulty collecting personal income taxes from out-of-state partners of pass-through entities chartered in their state. These difficulties have led them to require pass-through entities to withhold income taxes for the share o