Best no-income-tax state for business owners

§ II · Pass-Through vs C-Corp

Pass-through entities are tax-free at the state level in 8 of 9

For an LLC, S-corp, or partnership, business income flows through to the owners' personal returns. In a no-income-tax state, that personal return shows zero state tax owed on the business income. So the question for pass-through owners is: does the state impose a separate entity-level tax on top of the (zero) personal tax?

Wyoming, South Dakota, Florida, and Alaska impose no entity-level tax on pass-through entities. Annual report and registered-agent fees apply (typically $50 to $300 per year), but no profit tax. Texas applies the franchise tax to LLCs above $2.47M revenue. Tennessee applies the Franchise & Excise Tax (6.5 percent on net earnings + 0.25 percent on net worth) to LLCs and corps regardless of pass-through status. Nevada applies the Modified Business Tax to payroll above $50K per quarter and a Commerce Tax above $4M annual revenue. New Hampshire applies the Business Profits Tax (7.5 percent of net business income) and Business Enterprise Tax (0.55 percent of enterprise value) to LLCs and corps. Washington applies the B&O tax (gross receipts) to all business activity in Washington.

For a $500K-revenue, $100K-net-profit LLC: Wyoming, South Dakota, Florida tax = $0. Texas tax = $0 (under $2.47M franchise threshold). Nevada tax = depends on payroll, often $0 to $2K. Tennessee F&E tax = approximately $6,500 (6.5 percent of $100K) plus $250 (0.25 percent of net worth, depending on equity). New Hampshire BPT + BET = approximately $7,500 plus $1,100. Washington B&O on $500K revenue at 1.5 percent service rate = $7,500. Alaska corporate tax (only on C-corps) = $0 for LLC pass-through. The cleanest no-tax states for a $500K small business are Wyoming, South Dakota, Florida, Alaska, and (under franchise threshold) Texas.

$500K LLC = $500K revenue with 20% net margin ($100K profit). $5M LLC = $5M revenue with 20% net margin ($1M profit). Service business (1.5% B&O rate for WA). Estimates rounded.

§ IV · Washington B&O Tax

Washington's B&O tax: the gross-receipts trap

Washington's Business and Occupation tax (RCW 82.04) is among the most distinctive and most punitive business tax structures in the United States. Unlike a corporate income tax (which applies to net income after expenses), B&O is a gross receipts tax. It is calculated on every dollar of business revenue, regardless of whether the business made a profit or a loss. The rates: 0.138 percent for manufacturing and wholesaling, 0.484 percent for service activities (other than professional services), 1.5 percent for professional services and most consulting and creative services, with various other category-specific rates.

For a high-margin manufacturer, the B&O tax is modest. A $10M-revenue, $2M-profit manufacturer pays $13,800 in B&O (0.138 percent of $10M), or about 0.7 percent of net profit. For a low-margin service business, the B&O tax is punishing. A $2M-revenue consulting firm with 10 percent net margin pays approximately $30,000 in B&O (1.5 percent of $2M), which is 15 percent of the $200K net profit. A $5M consulting firm with 8 percent margin pays $75,000 in B&O on $400K profit, or 18.75 percent.

For consultants, agencies, professional services firms, and most tech-services businesses, Washington's B&O tax is materially worse than the corporate income tax in most other states. A $5M California PSF with 10 percent margin would pay California corporate franchise tax of $4,400 (8.84 percent of $50K, the minimum tax rules apply); the same firm in Washington pays $75,000 in B&O. Washington's no-personal-income-tax advantage is real for owners drawing salary, but the B&O tax can wipe out the saving for service businesses with significant gross revenue. Wyoming, South Dakota, Texas (under $2.47M), Florida (LLC pass-through), and Tennessee (despite F&E tax) are all materially better for Washington-style service businesses.

§ VI · Three Business Owner Personas

Three honest business-owner profiles