State income tax on business
Most states tax business income. Sole proprietors report on the state version of Schedule C (sometimes integrated into the personal return). Pass-through entities (partnerships, S-corps) typically file an entity-level information return plus issue state K-1s. C-corps pay state corporate income tax.
States with no income tax
No state personal income tax: Alaska, Florida, Nevada, New Hampshire (interest/dividends only), South Dakota, Tennessee, Texas, Washington, Wyoming. No state corporate income tax: a different list (notably Nevada, South Dakota, Wyoming). Living in a no-income-tax state reduces but does not eliminate state-level obligations (sales tax, franchise tax, business licenses still apply).
Pass-through entity tax (PTET)
Many states have enacted PTET regimes that let pass-through entities elect to pay state income tax at the entity level (deductible federally, bypassing the SALT cap) and credit the tax to the owners. New York, California, New Jersey, Connecticut, and many others have PTET. Election mechanics and timing vary widely.
State-specific franchise taxes
California (LLC: $800 minimum + gross-receipts fee; corp: 1.5% S-corp / 8.84% C-corp), Texas (margin tax), Delaware (annual report fee), and others impose franchise or capital-based taxes regardless of profit. Plan for these from formation, not at first return.
Multi-state nexus
If you have customers, employees, or property in multiple states, you may have income tax nexus in more than one state. Apportionment formulas allocate income across states based on sales, payroll, and property. Sole proprietors with home offices in one state and clients in many states often have only home-state nexus, but the rules are state-specific.
When to bring in a professional
DIY tax software handles most small-business returns competently, but a handful of situations reliably justify a CPA or enrolled agent: an entity formation or election, a multi-state filing situation, a significant fixed-asset purchase that triggers Section 179 or bonus depreciation modeling, a retirement-plan setup, an IRS notice or examination, and the year of an entity sale. Outside those situations, software plus an annual half-day of personal review produces a defensible return. The cheapest professional engagement is a one-hour consultation rather than a full-service tax-prep relationship.