Last modified: Thursday, November 4, 2004
New IU report looks at business income taxes in Indiana
BLOOMINGTON, Ind. -- While the majority of corporations nationwide report no federal business income tax liability, more than half of firms doing business in Indiana do pay income taxes, according to a new report from Indiana University's Kelley School of Business. However, most businesses file individual tax returns rather than as corporations.
In their article in the fall issue of the Indiana Business Review, Dagney Faulk, assistant professor of economics at IU Southeast, and Jim Landers, a senior fiscal/program analyst with the Indiana Legislative Services Agency, studied the most current state data to determine who pays business income taxes in Indiana.
Under Indiana's tax system -- which was restructured in 2002 -- businesses paying taxes through the individual tax system face a 3.4 percent income tax rate, while those paying through the corporate tax system face an 8.5 percent rate. Faulk and Landers saw a tendency for companies doing business in Indiana to favor filings of individual taxes.
"The examination of business income taxed through the individual income tax system is particularly pertinent since new forms of business organization, such as limited liability companies, and differential tax rates between corporate and individual tax systems have led an increasing number of businesses to be taxed under the individual rather than the corporate tax system," Faulk and Landers observed in their article, "Business Income Taxes in Indiana: Who Pays."
The IBR is a quarterly research publication of the Kelley School's Indiana Business Research Center.
In 2001, the last year for which the data is available, 39,450 Indiana corporate income tax returns were filed. They included 580 returns from financial institutions, 21,600 returns from Schedule C corporations and 17,250 returns from IT-20C corporations. More than 124,000 information returns were filed for partnerships and S corporations and were not included in their analysis.
Just over 44 percent of these corporations had no income tax liability. Of all corporate returns, almost 88 percent paid $10,000 or less in income taxes and only 2.5 percent, or 1,000 corporations, paid almost 80 percent of the total corporate tax liability.
While multistate corporations represented about 35 percent of returns filed, these corporations paid about 83 percent of total corporate income tax. More than twice as many corporations with only Indiana ties (58.4 percent) had no tax liability.
"In both cases, a small number of corporations paid the bulk of corporate income taxes," the authors noted. They found that 385 of multistate corporations paid more than 70 percent of the total corporate income tax liability for those firms, while 311 Indiana-only firms paid about 70 percent of the tax liability for in-state corporations.
By comparison, there were more than 1 million Indiana individual income tax returns which included at least one type of business income, representing about 33 percent of all individual returns filed in 2001, and many returns reported more than one form of business income.
Faulk and Landers found that about 15 percent of income taxed through the individual income tax system is business income.
"Individual adjusted gross income tax revenue was approximately $3.58 billion in 2001, so the share of tax revenue paid by business was approximately $540 million, or 15 percent. This represents less than 1 percent of gross state product and about 6 percent of state operating revenue for the 2001 fiscal year," they wrote.
Also in the new issue of the IBR are articles on defining the industry mix of a county and the ethnic diversification of the suburbs in Indiana. Articles will be available in their entirety online for no charge at http://www.ibrc.indiana.edu/ibr/index.html.