How does Louisiana tax a corporation that is classified by the IRS as an "S" (small business) corporation?

Louisiana taxes Subchapter S corporations, known as S corporations or Sub S corporations, in the same manner as regular corporations, with one exception. For federal tax purposes, an S corporation will determine its items of income and expense in the same manner as if it were a regular "C" corporation. Since the classification of a Subchapter S corporation is a determination made under federal law, any question regarding that classification must be referred to the IRS.

A corporation classified by the IRS as an "S" corporation may exclude all or part of its income derived from the activities of the corporation, depending upon the domicile of the shareholders. Shareholders who are Louisiana residents are required to file a Louisiana individual income tax return to report their portion of the income derived from the activities of the corporation. In general terms, the portion of income that can be excluded is determined by the ratio of the number of issued and outstanding shares of the S corporation’s capital stock owned by Louisiana resident individuals to total number of issues and outstanding shares of capital stock.

Shareholders who are nonresidents of Louisiana may elect to file the individual nonresident and part-year resident return to report their portion of the income derived from the activities of the S corporation or to allow the corporation to pay the tax at the corporate income tax rate on their portion of the income. When electing the second method, the Subchapter S exclusion must not offset the net income to be reported on the corporation income and franchise taxes return.

An S corporation is not exempt from franchise tax. The franchise tax is imposed on an S corporation in the same manner as it is for a C corporation.