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STARTING AND OPERATING A BUSINESS IN ALASKA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION I. INTRODUCTION Alaska has a somewhat unusual tax and legal structure under which businesses must operate. It also has an exceptionally friendly business climate, with no state personal income tax, no gross receipts tax, no state wide property or sales tax, and no personal property tax on intangible assets. It is one of only two states -- New Hampshire is the other -- that has no general individual income tax and no state sales tax, and unlike New Hampshire, Alaska does not tax business profits of unincorporated businesses. It is also one of the few states that does not impose any real estate conveyance taxes on sales of real property. The main Alaska taxes a business may have to pay are the corporate income tax, specific natural resource taxes and taxes on commercial fishing, in addition to collecting local sales taxes in some cities, such as Juneau, Nome, Ketchikan, and Homer (but not in Anchorage). Taxes in Alaska are quite low, in relation to per capita incomes of residents. A 2005 study by the Tax Foundation found that Alaska, at 6.4%, had the lowest ratio of state taxes to per capita income of any state in the nation. In New Hampshire, the second lowest, the ratio was 7.4%, and the worst state was Maine, at 13%. Unique among the 50 states, Alaska pays each of its legal residents an annual "permanent fund dividend" from a large investment fund (the "Permanent Fund Corporation") that is maintained by the state. The fund was created in 1976 to receive 25% of the Alaska's large royalties from its huge oil and gas reserves, and such funds are invested in stocks, bonds, real estate, and other investments. Each eligible individual in Alaska receives a dividend from the fund each year, which has generally ranged from approximately $1,000 to $2,000, and was $1,654.00 in 2007. This was an almost double the $845.76 paid for 2005, and substantially more than the $1,106.96 paid in 2006. In 2008, residents received an additional one-time "resource rebate" of $1,200, making the total permanent dividend $3,269 per resident in 2008. At this writing, the 2009 dividend has not yet been determined, but will likely be much lower, due to the collapse in the price of oil, and severe shrinkage in the state's Permanent Fund Corporation assets, due to falling prices in nearly all segments of its investment portfolio. The state has adopted a limited liability company (LLC) law and a limited liability partnership (LLP) law, so that businesses operating in Alaska in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. There are two forms of local government in Alaska: cities and boroughs. Unlike other states, which have been subdivided into counties (or, in Louisiana, parishes), Alaska is unique because most of it has not been organized into political units. Currently, thirteen organized boroughs, which are roughly the equivalent of counties or parishes in other states, cover about one-third of the state. At present, the Alaska economy is somewhat depressed, in terms of the level of unemployment and other economic measures, and the falling price of oil has worsened unemployment in the last year, from 6.3% in November, 2007 to 7.3% in November, 2008. This compares unfavorably to the national unemployment rate of only 6.8% for the same month. In addition, the state has a very high cost of living, compared to national averages, which is reflected in its state minimum wage, which is now $7.15 an hour. To view the latest federal Bureau of Labor Statistics unemployment rate data for Alaska or any other state, visit the BLS website. Much of the recent sluggishness in the Alaska economy was attributable to a decline in the fishing industry, due to collapsing fish populations and competition overseas from farm-raised salmon, as well as consolidation of the oil operations of major oil companies on the North Slope, which has caused major cuts in oil industry employment in recent years. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Alaska can operate as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. Since Alaska has no state individual income tax, this means the income of S corporations is not subject to state tax in Alaska, either at the corporate or the shareholder level. Alaska also provides for limited liability partnerships, in which no partner is liable for debts of the partnership, in general, as in the case of a corporation or LLC, but with fewer legal formalities, generally, than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV below. (b) Sole Proprietorships. In Alaska, no permission is needed from the government to start a sole proprietorship business, except to obtain a state business license, which is required for any form of business. Since there is no state personal income tax, no tax form filing to report the income of a sole proprietorship for Alaska state tax purposes is required. Sole proprietors report their business income only on their federal income tax returns, Schedule C of Form 1040. Contact the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing, in order to register for a state business license. All forms of business organizations doing business in Alaska must pay a $200 biennial license fee (or $100 annual license fee) to the state, with only a few exceptions for businesses that are required to have certain other types of licenses, such as commercial fishing licenses, liquor licenses (for alcohol only), and certain insurance and mining licenses. The license fee is reduced to $50 per year for a sole proprietor who is or will be 65 years of age in the year the license application is filed. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any income taxes from wages, or obtain workers' compensation coverage for yourself. However, if your sole proprietorship operates under an assumed or fictitious business name (trade name), you should register the name, as discussed in Section IV(g). Contact information for the Division of Corporations, Business and Professional Licensing is listed in Section VI(a). (c) Partnerships. Alaska's partnership laws allow creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability (subject to certain exceptions). There is no personal income tax in Alaska, so the income of a partnership is not taxed to the individual partners for state income tax purposes -- but will be taxed to partners that are C corporations. Partnerships are not required to file an annual tax information return with the state, except in instances where a partnership has one or more corporate partners. As with all forms of business, most partnerships are required to obtain a state business license from the state of Alaska, as described in Section IV(b). Partnerships must register with the state by filing with the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing. Contact information for that agency is listed in Section VI(a). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Alaska can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as discussed in Section IV(b), it will generally be necessary to obtain one or more local business licenses from localities in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. There are no specific filing requirements that apply to general partnerships under Alaska state law. However, a partnership may file a Statement of Partnership Authority with the Corporations Section of the Department of Commerce, Community and Economic Development, designating which partners in the partnership have (or do not have) the authority to enter into specified types of transactions, such as real estate transactions. There is a $25 fee to file a Statement of Partnership Authority. A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Alaska law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the Corporations Section of the Department of Commerce, Community and Economic Development, together with a filing fee of $150. Foreign limited partnerships must also register before being allowed to do business in Alaska, and must pay a registration fee of $150. For information on limited partnership filing requirements, see the contact information for the offices of the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing, Corporation Section, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Alaska. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Alaska state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. Partners in a general partnership can obtain limited liability protection by simply registering the partnership with the state as an LLP. Effective January 1, 2001, Alaska enacted a new version of the Alaska Limited Liability Partnership Act and a revised version of the Uniform Partnership Act. The new law applies to all LLP's formed on or after January 1, 2001. Until January 1, 2004, previously existing LLP's could elect to come under the provisions of the new act. On and after January 1, 2004, the new act applies to all LLP's formed in or doing business in Alaska. The new laws provide considerably more extensive liability protection for partners in an LLP than the prior law. Every LLP doing business in the state formerly had to meet certain minimum financial responsibility requirements. However, this requirement was eliminated in the new version of the Alaska Limited Liability Partnership Act (part of the Uniform Partnership Act, as in effect on and after January 1, 2004). Any domestic or foreign partnership may register with the state of Alaska to become a registered limited liability partnership (LLP), by filing a brief registration form with the Department of Commerce, Community and Economic Development and paying a fee of $250 for a domestic partnership or $350 for a foreign partnership. Every LLP doing business in Alaska, including both domestic and foreign LLP's must file biennial reports every other year with the Department of Commerce, Community and Economic Development. Every domestic LLP must pay a $100 biennial renewal fee; a $200 renewal fee must be paid every two years by a foreign LLP. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Department of Commerce, Community and Economic Development, Corporations Section, listed in Section VI(a). Note that one potential drawback of LLP's, if you will do business in other states besides Alaska, is that some states, like California and New York, only recognize certain types of professional partnerships as LLP's. If yours is not a professional partnership, such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. (d) Corporations. To form a corporation in Alaska, you must file articles of incorporation with the Corporations Section, Division of Corporations, Business and Professional Licensing of the Alaska Department of Commerce, Community and Economic Development. There is an initial fee of $150 for filing articles of incorporation, and a $100 biennial corporate tax that must be prepaid, for a total initial filing cost of $250. Filing fees, other than the biennial corporate tax, are set by the Alaska Department of Commerce. Foreign corporations -- those created under the laws of another state -- must obtain a certificate of authority to do business in Alaska, from the above agency. They pay an initial filing fee of $150 plus a $200 biennial corporate tax. Foreign corporations were formerly required to also file an annual affidavit of estimated taxes and license fees by June 2 of each year, but this requirement has been repealed. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Alaska, see the contact information for the offices of the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing, Corporations Section, listed in Section VI(a). All for-profit corporations in Alaska, including foreign corporations and S corporations, are required to file biennial corporate reports and pay the biennial corporate tax of $100 for domestic corporations or $200 for foreign corporations by January 2, every other year. In addition to paying federal income taxes on its income, a corporation that does business in Alaska must also file corporate income tax returns with the state. See Section IV(c), for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate income taxes in Alaska, see the contact information for the offices of the Alaska Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. Since Alaska does not generally impose corporate income taxes on the income of an S corporation, and since there is no state income tax on individuals, the income of a business that is conducted in the form of an S corporation in Alaska will not be subject to any state income taxation, ordinarily, unless it has excessive net passive income or built-in gains that are subject to corporate level tax under federal tax laws. However, like any other for-profit corporation, an S corporation is required to file biennial reports and pay the applicable fee of $100 (or $200 for foreign corporations). (f) Limited Liability Companies. Alaska, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Alaska may also choose to operate in the form of an LLC. In most states, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. Federal tax laws also allow a single-member LLC to be disregarded for federal tax purposes, so that an individual who creates a single-member LLC to conduct his or her business will continue to report income or losses as a sole proprietorship, since the LLC will be treated as a "disregarded entity." Alaska has no personal income tax, and does not tax the income of an LLC unless it is treated as a corporation for federal income tax purposes. See Section IV(c) for a discussion of the income tax treatment of LLC's under Alaska tax laws. One or more persons may form an LLC in Alaska. There is no longer a requirement that an LLC have 2 or more members or a limited duration of existence. To form an LLC in Alaska, there is a filing fee of $150 to file articles of organization or to register a foreign LLC, plus payment of the initial fee for a biennial report, of $100 for a domestic LLC or $200 for a foreign LLC. File with the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing, Corporations Section. In addition to initial filing fees, an LLC formed in Alaska must subsequently file reports every other year and pay a filing fee of $100 with each report. A foreign LLC is also required to file a biennial report and pay the applicable filing fee of $200. UPDATE NOTE: For more information on filing articles of organization for an LLC, see the contact information for the offices of the Alaska Department of Commerce, Community and Economic Development, Division of Corporations, Business and Professional Licensing, Corporations Section, listed in Section VI(a). This agency is a division of the Alaska Department of Commerce, Community and Economic Development. (g) Alaska Securities Laws. Note that when your newly formed corporation issues shares of its stock to you or to anyone else as shareholders, you must be very careful to comply with both federal and Alaska securities laws. Sales of limited partnership interests or interests in a limited liability company or LLP are generally considered to be sales of securities, as well. Failure to comply with securities laws may subject you to lawsuits from disgruntled investors in the company or criminal prosecutions by the SEC or the state. Alaska law exempts certain small offering transactions if there is no public solicitation or advertisement of the offering, and the offering is made to either:
This is a highly technical area of the law, one for which you should consult a business attorney for advice and assistance. Also, for more detailed state securities law information, contact the administrator of securities at the state Division of Corporations, Business and Professional Licensing, Corporations Section. III. BUSINESS ACQUISITIONS (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching district, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. (Unlike other states, Alaska is broken up into 34 recording districts which are centrally administered under a State Recorder. All recording districts use the same acceptance criteria, fee schedule, etc., for accepting documents into the public record.) You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to achieve considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. (Alaska has no state sales or use tax, but some cities in the state do have such taxes.) Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Alaska is one of the states that has repealed its bulk sale laws so you no longer have to be concerned with this requirement when buying a business in Alaska. However, before you close the purchase of a business, it is important to know if there are any security interests or liens against any of the assets of the business that would interfere with your receiving clear title to such assets. To check for such liens on property other than real estate, you or your attorney must do a search of the state records. Most such filings are made at UCC Central File Systems, Alaska Department of Natural Resources, in Anchorage. See the contact information for this agency listed in Section VI(a). (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business occurs. When acquiring an existing business in Alaska that has employees, you will need to get the seller to obtain a receipt from the Alaska Department of Labor and Workforce Development, certifying that there are no unpaid or overdue unemployment taxes owing. If there are any such taxes outstanding, you must withhold that amount from the purchase price, or you will be liable to the state for such tax, if the tax is not paid by the seller within 10 days after the purchase of the business or business unit. There is no state income tax on individuals in Alaska, so you do not have to be concerned with state income tax withheld from employees' wages, since there is none. There is also no state sales tax in Alaska, but you may need to obtain sales tax clearances from cities that have sales taxes; at present, only 90 of the 162 incorporated municipalities in Alaska impose sales taxes. Contact the city clerks where the seller does business for information on procedures, if you are buying an existing business. (d) Unemployment Tax Rating of Seller. Besides obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. If you acquire an entire business or a distinct unit of a business, the tax already paid on wages of the acquired employees earlier in the year can be counted as though your business paid such tax so that, for example, if an acquired employee's wages had already reached or exceeded the annual wage base on which tax must be paid, you would not need to pay any tax on wages paid to that employee for the rest of the year. If you acquire substantially all of the operating assets of another business, you will generally succeed to the seller's experience rating, unless the Employment Security Division determines that the primary purpose of the acquisition was to obtain a lower tax rate. If your business was already an employer before the purchase, you will continue to use your experience rating for the rest of that year, but your rating in the following years will be based on a blending of your experience rating and that of the acquired business. To determine if you can or must succeed to a seller's experience rating and be treated as a successor employer, contact the Employment Security Tax Section, Division of Employment Security, of the Alaska Department of Labor and Workforce Development, at the address listed for that agency in Section VI(a). IV. ALASKA TAXES AND OTHER GENERAL REQUIREMENTS (a) In General.
Alaska has a very favorable tax environment, as the state has
been fortunate since the discovery of vast oil deposits at
Prudhoe Bay to derive most of its operating revenues from that
source. As a result, the state has no personal income tax and
no statewide sales tax, although there are local sales taxes
in some cities. Most of the state's tax revenue comes from
the corporate income tax and various natural resource taxes
on fishing and mineral production.
Note that voters in Fairbanks, in municipal elections on
October 3, 2006, approved an amendment to the city charter
which limits property taxes to a maximum rate of 0.5 mills,
unless voters approve a higher rate at a general election.
Another amendment to the city charter requires that any new
or additional sales taxes, other than hotel/motel, alcohol,
and tobacco taxes, must also be approved by voters in a
general election.
For state tax forms and tax information, see the contact
information for the Alaska Department of Revenue
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States, will
have to have at least one government license of some kind. In most
cases, this will be a local license, issued by your city or county
(or, in Alaska, your borough, rather than county).
Before you open your business in Alaska, contact your local city
or borough government and find out if your particular business needs
one or more local licenses. Most kinds of local business licenses
are granted upon payment of a fee, with no further requirements,
except possibly for annual or other periodic renewal fees. A number
of Alaska cities impose a raw fish tax while others impose a
lodging or room rental tax or fee on hotels and motels.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning and
planning restrictions. If you own or rent any type of
facility, you will generally need fire department permits,
showing that you meet fire safety codes and any construction
or improvements to an existing structure will usually
require a building permit. If you intend to simply operate
your business from your home, you may be in violation of
local zoning requirements, but this is less likely to be a
concern if you don't have clients, customers, suppliers, or
employees coming to your house on business on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Alaska has expanded the list of occupations that
must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing.
All businesses in Alaska must obtain a business license.
The biennial fee for a license is $200 and must be submitted
with a completed Alaska Business License Application,
Form 08-4181. A separate license is required
for each separate line of business you operate. However, only
one license is required for each line of business, even if that
line of business has multiple locations in Alaska. The biennial
license fee or tax is reduced to $100 ($50 per year) for sole
proprietors who are 65 years old or older.
Annual licenses expire on December 31 of the year purchased
and biennial licenses expire on December 31 of the year
following the year purchased.
Some businesses also require a separate occupational
license, ranging from professions such as accountants or
naturopaths to occupations like waste water system
operators.
The state provides a free Directory of Licensed
Occupations in Alaska. This publication is available
from the Research and Analysis section of the Alaska
Department of Labor and Workforce Development.
For information on state licensing and business registration
requirements in Alaska, see the contact information for the
offices of the Division of Corporations, Business and Professional
Licensing, of the Alaska Department of Commerce, Community and
Economic Development and for the Research and Analysis section of
the Alaska Department of Labor and Workforce Development, both of
which are listed in Section VI(a).
(c) Income and Franchise Taxes.
Alaska is one of the few states that does not have an individual
income tax. Thus, there is no state income tax on the earnings
of individuals from a business that is conducted as a sole
proprietorship. However, Alaska does have a corporation income
tax on corporations other than S corporations.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
Since there is no individual income tax or tax on the income
of pass-through entities (partnerships, LLC's, or S corporations),
individuals do not have to pay any state tax on the income of
their Alaska business.
Partnerships are pass-through entities for Alaska income
tax purposes, and are not subject to tax themselves, as
separate taxable entities. Since there is no individual
state income tax in Alaska, the income earned by a
partnership is taxable only to any partners that are
corporations (other than S corporation partners).
No state estimated income tax payments are required in
Alaska for sole proprietors or most partnerships, since
there is no state individual income tax. However, those
partnerships that have corporate general partners are
required to make a declaration of estimated income tax.
In 2008, corporations that do business in Alaska, other
than S corporations, are subject to a graduated state income
tax on their annual taxable income, ranging from 1% on the
first $10,000 of income to 9.4% on income in excess of $90,000.
Unlike other states, Alaska also imposes penalty taxes on personal
holding companies, at 12.6% of personal holding company income,
and on accumulated earnings (4.95%, or 6.93% on the accumulated
earnings in excess of $100,000), both of which taxes are computed
like the federal personal holding company and accumulated
earnings taxes, except for the tax rates. Alaska also imposes an
alternative minimum tax (AMT) on corporations, at 18% of the
applicable federal AMT rate.
The Alaska corporation income tax return, Form 04-611,
is due within 30 days after the federal return due date,
without regard to extensions, but the tax must be paid by
March 15th, for a calendar year corporation, although its
return would not be due until April 15th. Alaska has adopted
the federal Internal Revenue Code and Regulations by reference,
so that the tax status of a corporation or LLC for federal
tax purposes will also apply under the Alaska Net Income
Tax Act, and other federal rules also generally apply,
except where Alaska has adopted a different law or
administrative regulation, such as for the filing date
for corporate tax returns.
Corporations and limited liability companies that are
subject to the state corporation income tax (those LLC's
that have elected to be taxed as corporations for federal
income tax purposes) are required to make an estimated tax
declaration and to file quarterly estimated income tax
returns. Estimated tax payments are filed with the Alaska
Department of Revenue. Corporations (or LLC's taxable as
corporations) whose tax liability is $500 or more must pay
in estimated tax payments equal to the lesser of 100% of
the current year's tax liability, or 100% of the previous
year's tax liability. Certain large corporations may only
base their first quarterly payment on the prior year's tax
liability. Estimated tax payments are to be made with the
estimated tax voucher Form 04-711.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
An S corporation that does business in Alaska is
required to file an Alaska return. Generally, an S
corporation will satisfy its filing obligation by filing
the applicable Form 0405-611 (pages 1 and 2)
or Form 0405-611SF (page 1) with the "S
corporation" box on page 1 checked. Alaska does not impose
a tax on an S corporation for pass-through items of income
or loss. However, it does impose a tax where the federal
excessive passive income tax or the corporate level tax on
built-in gains applies. Where either of these taxes apply,
Alaska taxes the income at the highest state tax rate (9.4%),
although the Alaska capital gains rate of 4.5% may apply
in some cases.
For more information on the Alaska corporate income tax,
see the contact information for the Department of Revenue
that is listed in Section VI(a) for
that agency.
TAXATION OF LIMITED LIABILITY COMPANIES
In Alaska, a limited liability company (LLC) with two
or more members is treated as either a partnership or a
corporation for tax purposes, depending on how it is
categorized for federal income tax purposes.
Thus, in the typical case, an LLC will be taxed as a partnership,
thereby avoiding possible double federal taxation of income that
can occur with a corporation. Since there is no individual income
tax in Alaska, the income of an LLC will be completely free from
Alaska state taxation, if the LLC is categorized as a partnership,
except where a member of the LLC is a C corporation, which will
be taxable on its share of the LLC's taxable income. Unless an
LLC has elected corporation tax status, it is not required to
file a partnership tax return unless it is treated as a
partnership and has one or more corporate members.
Note that under IRS regulations, effective since 1997,
an LLC is able to elect to be treated as a partnership if
it has more than one owner, or as a sole proprietorship
if it does not, for federal tax purposes. Alaska now also
recognizes the validity of a one-owner LLC, and since
Alaska law adopts the federal Internal Revenue Code and
tax regulations by reference, LLC's are treated the same
as under the federal tax law. Thus, a single-member LLC
would presumably be treated as a disregarded entity for
Alaska tax purposes, but that is irrelevant in the case
of an LLC owned by an individual, unless the LLC has
elected to be taxed as a corporation. Also, an LLC owned
entirely by a corporation would be treated as a disregarded
entity (a part of the corporation), as under federal law,
since Alaska law does not specify a different treatment.
Alaska's LLC law allows for single-owner LLC's, effective
since July 1, 1997.
Note that it is not always entirely clear, for federal tax
purposes, whether an LLC is a "single-member LLC" or not, where
the "single owner" is a married couple who hold the entire ownership
of the LLC in some form of co-tenancy, such as joint tenants with right
of survivorship, tenants by the entirety, or as tenants in common.
The federal Internal Revenue Service (IRS) has taken a very lenient
position in Rev. Proc. 2002-69, where a couple hold the LLC
interest as community property, ruling that the IRS will accept
whatever choice the couple make, either to disregard the LLC as an
entity (treating it as a "single-member LLC") or to treat it as a
partnership between the husband and wife.
However, Alaska is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property.
(d) Sales and Use Tax. Alaska has no state wide sales or use tax, but many cities and boroughs impose sales taxes that may range from 1% to 7%. Among those localities levying sales taxes are Juneau City and Borough, Homer, Nome, and Ketchikan City. (Boroughs in Alaska are roughly the equivalent of counties.) Tax rates are 5% in Juneau and Nome, 3.5% in Ketchikan and Homer. No sales tax is currently levied in Anchorage, Fairbanks, or Valdez. Anchorage and Fairbanks do impose 8% bed (lodging) taxes, however, and Valdez imposes a 6% bed tax. Anchorage also imposes an 8% tax on car rentals. For more information on local sales and use tax registration and compliance in your locality, contact your local city or borough offices. Effective January 1, 2004, Alaska began imposing a vehicle rental tax of 10% for passenger vehicles or 3% for renting or leasing of recreational vehicles (motor homes, campers, or RV's). (e) Real and Personal Property Taxes. Cities and boroughs in Alaska generally levy and collect property taxes on both real and personal property located within their jurisdictions. In general, there is little that you must do in the way of compliance, unless you wish to challenge your assessed valuation, since the assessors will bill you for each year's property taxes as they come due. However, unlike any other state in America, there are a large number of areas in Alaska where no real property taxes are levied. While Alaska generally taxes tangible personal property, it does not impose a property tax on intangible personal property, such as money, stocks, bonds, promissory notes, and other such paper assets. However, unlike many other states, Alaska does not exempt business inventories from property taxes, although towns are allowed to exempt inventories if they choose to do so. (f) Other Business Taxes. Alaska imposes a number of excise and other taxes on businesses, including:
Effective April 1, 2006, a new "net profits tax" of 22.5% was imposed on oil and gas production in Alaska, replacing the former gross tax on such production. The new tax is on the "production tax value" of all oil and gas produced each month, less any oil and gas the ownership or right to which:
Effective July 1, 2007, the oil and gas production tax was increased to 25%, plus additional taxes in any month in which the producer receives prices in excess of certain levels per barrel of oil (or equivalent BTU value of gas). Unlike most other states, Alaska does not impose any real estate conveyance taxes on transfers of real estate. Because fishing is one of Alaska's major industries, the state imposes a number of taxes and regulations on the fisheries and canning industries, some of which are described in the following paragraphs. If you are in the fishing industry, you will be subject to numerous fishing taxes and fees, including a $25 license fee for each location or vessel. Taxes include a 4.5% tax on shore-based salmon canneries or 3% tax on other shore-based canneries. Other taxes on fishing businesses include a 5% tax on floating fisheries. Reduced tax rates may apply for certain developing fish species. Other special fishing industry taxes include a 1%, 2%, or 3% salmon enhancement tax, imposed on the sale or transfer of salmon. Until 2005, a salmon marketing tax of 1% of the salmon resource value applied, but this tax was repealed, effective in 2005, and in its place the seafood marketing assessment fee was increased slightly, from 0.3% to 0.5%, which does not apply if the value of seafood products reported is less than $50,000. A landing tax of 3% is imposed on fisheries resources that are first landed in the state and not otherwise subject to the fisheries business tax, or 1% for a "developing commercial fish species." If you process seafood, you are also subject to a seafood marketing assessment each year, as noted above. For more details, contact the Income and Excise Tax Audit Division of the Alaska Department of Revenue. (g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. In Alaska, if you have a corporation or your business has a fictitious business name, you will need to register it, in order to provide a public record of all the owners of a business. To register a business name, complete and submit an application and $25 fee to the Corporations Section of the Division of Corporations, Business and Professional Licensing. The registration is good for five years and is renewable. For more information, contact the Corporations Section, Division of Corporations, Business and Professional Licensing, of the Alaska Department of Commerce, Community and Economic Development. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will have to withhold federal income tax and FICA taxes from their wages. However, since there is no state personal income tax in Alaska, employers need only to withhold federal taxes from employee wages, except for the employee portion of the state unemployment tax, discussed in Section V(b). (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees, you must register as an employer (Alaska Employer Registration, Form TREG) and pay state unemployment tax. Alaska unemployment tax applies to the first $32,700 of wages per employee in 2009. The rate of tax varies, depending on your firm's "experience rating" and the firm's industry category. Under Alaska's unemployment insurance law, services rendered by corporate officers are "employment" and must be covered. However, state law also states that service by officers of a business corporation is NOT "employment" and thus is excluded from coverage. While the Alaska law seems unclear as to whether compensation paid to officers of a corporation is subject to unemployment tax, the tax handbook published by the Department of Labor and Workforce Development, Employment Security Division, concludes that executive officers of a business or professional corporation ARE excluded from unemployment insurance coverage. While state law and administrative regulations do not specifically exempt self-employed persons, the tax handbook (p. 12) states that sole proprietors, partners in a partnership, and managing members of a limited liability company are all considered to be self-employed and thus are not required to be covered, nor may they elect to be covered by unemployment insurance. Real estate and insurance salespersons and brokers are also exempt from coverage. The Alaska definition of an employer (employing unit) includes any type of business organization, though it does not specifically refer to limited liability companies, and does not address whether a single member LLC is to be disregarded as an entity for unemployment tax purposes. However, the Alaska Employment Security Division advises that if a company is operating a business in Alaska as an LLC and its business license shows it is an LLC, that is how it should register for unemployment tax. Unemployment contribution reports and taxes are due each quarter. Reports are filed on Form 1004. New employers are required to pay tax at a set rate which depends on the industry. The "standard rate" for 2008 is 2.46%. All employers are required to post a notice of unemployment compensation coverage in the workplace. After you have had employees for a while, you will develop an unemployment tax experience rating. This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. The above unemployment taxes must be paid by you, as the employer. However, your employees must also pay in a small portion of their wages, 0.50% on the wage base amount (in 2009), which you must withhold from their paychecks and pay over to the state along with the employer contributions. To obtain a free booklet, the Alaska Employment Security Tax Handbook, and for other information about your responsibilities under the state unemployment tax laws, contact the Employment Security Tax Section, Division of Employment Security, of the Alaska Department of Labor and Workforce Development. Address information for that agency is listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Alaska, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership is generally not considered an employee, but may elect coverage. Members of a member-managed limited liability company are also not generally considered to be employees. Executive officers of a for-profit corporation are considered to be employees under the workers' compensation law, but may choose to waive coverage, with approval of the commissioner of labor. Coverage must be obtained from commercial insurance companies. If you are unable to obtain coverage from a commercial insurer, you may obtain it from Alaska's Assigned Risk Pool, which is administered by the National Council on Compensation Insurance (NCCI). Certain types of employees are not covered, such as:
Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job-related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. CAUTION: As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage. Employers who have obtained insurance coverage must provide proof of insurance to the Division of Workers' Compensation on Form 07-6119 (usually submitted by the insurance company). For more detailed information regarding your obligations as an employer under the Alaska workers' compensation laws, contact your insurance carrier or see the contact information for the offices of the Workers' Compensation Division of the Alaska Department of Labor and Workforce Development, listed in Section VI(a). (d) State Wage and Hour Laws. Alaska's minimum wage is considerably higher than the federal minimum wage, at $7.15 since January 1, 2003. The state's overtime pay law requires that you pay all employees, except certain exempt classes of employees, such as executives, at a rate of one and one-half times their regular rate for all hours worked in excess of 40 per week or 8 hours in one day. However, the overtime pay requirement does not apply to small employers who employ less than four (4) workers in the regular course of business. Alaska is one of only three states (California and Nevada are the others) that require overtime pay for any daily hours worked in excess of 8 hours. However, such hours are not counted as overtime hours worked for purposes of the weekly 40-hour rule, since the employee is separately awarded overtime pay for the daily overtime hours worked. Daily overtime need not be paid except for hours worked in excess of 10 hours a day, if the employer and employee have entered into a written agreement defining the work week as four 10-hour days, and a copy of the flexible work plan agreement has been submitted to and approved by the Department of Labor and Workforce Development. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Alaska Department of Labor and Workforce Development. As under federal laws, the employment of children under age 18 is strictly regulated by the state of Alaska. As a general rule, children under age 18 may not work more than five hours without a half-hour break, more than six days in any one week, or in hazardous excavation, in mines underground, or in occupations that are dangerous to life or limb or injurious to the health of a minor. Children under 16 are protected by even stronger provisions, so that they may not work:
Children under age 14 cannot be employed, except in a few specified jobs, such as newspaper delivery or sales, domestic work or baby sitting, and casing cans under competent supervision in canneries. In addition, a minor under the age of 21 is generally prohibited from selling or serving alcoholic beverages, or working in a place where such beverages are sold, with certain exceptions. Minors under age 18 may not work in an establishment that offers adult entertainment For guidance and information regarding wage-hour and child labor laws, contact the Wage and Hour Administration of the Alaska Department of Labor and Workforce Development, at the address listed for that agency in Section VI(a). (e) State Occupational Safety and Health Laws. Approximately half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Alaska is one of the states that has its own OSHA-type agency, the Occupational Safety and Health Section, Division of Labor Standards and Safety, which is part of the Alaska Department of Labor and Workforce Development. Employers in Alaska must post a Safety and Health Protection on the Job notice at each work site, and inform employees of the location and nature of operations involving toxic or hazardous substances. The Alaska OSHA laws and regulations are somewhat more restrictive than Federal OSHA rules. For example, while Federal OSHA only requires employers to report an event causing death or hospitalization of three or more employees, Alaska requires reporting a single fatality or hospitalization of one employee due to a job-related injury. As an employer, you are required to furnish each employee with a place of work that is free from recognized hazards that cause or are likely to cause death or serious harm to employees. Employees who will be Note that while you may obtain a free safety consultation from federal OSHA experts, they must and will cite you for any violations they discover at your workplace. This is not the case with state safety inspections. If you request a free and confidential safety consultation from the state Division of Labor Standards and Safety and they detect violations, they will not cite you if you promptly correct the unsafe conditions. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the Juneau offices of the Occupational Safety and Health Section, Division of Labor Standards and Safety, of the Alaska Department of Labor and Workforce Development, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Alaska labor laws of which you need to be aware, as an employer, include the following: (1) Wage payments to terminated employees. Alaska law allows an employer to pay wages on either a monthly or semi-monthly basis, at the election of the employee, unless agreed in advance by an employment contract that provides for monthly wage payments. If an employee is terminated, you must generally pay his or her wages in three working days after termination, or else you may be liable for additional wages up to the time payment is made, up to 90 days after termination. However, if the employee quits, payment is due by the next regular payday that is at least 3 days after the employer received notice of the employee's termination of services. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Alaska does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Alaska and display a poster that informs employees of their rights to be free of illegal discrimination. Alaska laws prohibit discrimination in hiring and employing workers, on the basis of race, religion, color, national origin, age, physical or mental disability, sex, marital status, pregnancy, or parenthood when the reasonable demands of the position do not require distinction. While federal anti-discrimination laws generally exempt employers with fewer than 15 employees, Alaska's laws apply to employers with one or more employees. For more information on state civil rights laws in Alaska, contact the Alaska State Commission on Human rights at the address listed in Section VI(a). (4) Reporting new hires. Under federal welfare reform laws, employers in all states now have to report any newly-hired (or rehired) employees to a designated state agency (the Child Support Enforcement Division of the Department of Revenue for Alaska employers) within 20 days after the date of hire. Reports submitted electronically or magnetically must be submitted twice a month, on dates not less than 12 nor more than 16 days apart. Reports can be filed online on the Department of Revenue website or the completed forms can be mailed or faxed to the Child Support Enforcement Division at the New Hires reporting address or fax number listed in Section VI(a). (5) Lie Detector Tests Prohibited. Alaska state law prohibits private employers from requiring any employee or job applicant to submit to a polygraph or other type of lie detecting test as a condition for obtaining employment or continuing in employment. Unlike the lie detector test prohibitions under federal law or under most other states' laws, the Alaska law makes no exceptions for any types of businesses. Violation of this law carries criminal penalties, including a fine of up to $1,000 and up to a year in jail. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Alaska, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office, without your having to go from agency to agency to meet all the legal and regulatory licensing requirements. The Office of Economic Development maintains a "one-stop" Small Business Assistance Center, which provides information and assistance, including publications, for new and existing businesses. In 2007, the Center issued a 46-page publication entitled "Starting Your Small Business" for new Alaska businesses, which is also available online, available from the Office of Economic Development of the state Department of Commerce, Community and Economic Development at the web link listed for that agency in Section VI(c). Contact: Small Business Assistance Center CORPORATE, LIMITED PARTNERSHIP, AND LLC FILING. The Corporations Section of the Division of Corporations, Business and Professional Licensing, part of the Alaska Department of Commerce, Community and Economic Development, should be contacted for information on any of the following:
Contact the Division at: Corporations Section TAXES. Obtain Alaska corporate income and various other state business tax and registration forms, instructions and information from the Alaska Department of Revenue, which is the main tax collection agency in Alaska. Contact the Department of Revenue at: Alaska Department of Revenue For information on fisheries taxes and seafood marketing assessments, contact: Alaska Seafood Marketing Institute SEARCH FOR RECORDED SECURITY INTERESTS. When buying an existing business, you can make a statewide check for any recorded liens or security interests against any of its non-real estate assets by contacting: UCC Central File Systems STATE LABOR LAWS. Contact the Labor Standards and Safety Division of the following state agency about your obligations as an employer under various Alaska labor laws, including:
Alaska Department of Labor and Workforce Development STATE LICENSES. The following agency is the main Alaska licensing agency. Register with this state agency for your biennial Alaska business license and for various types of occupational and professional licenses: Division of Corporations, Business and Professional Licensing SALES TAX. There is no state wide sales tax in Alaska, although some cities, such as Juneau City and Borough, Homer, Nome, and Ketchikan City (but not Anchorage), impose local sales taxes. Check with your local city offices to see if you need to register for city sales taxes. FICTITIOUS NAME REGISTRATION. To register the use of a fictitious business name (trade name), submit your fictitious name registration and filing fee to: Corporations Section STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Employment Security Tax Section NEW HIRES REPORTING. Mail new hire reports to the following address, or fax the completed forms, to: Alaska Department of Revenue WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Workers' Compensation Division STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Alaska, or to obtain a copy of the OSH Manager's Handbook,contact: Alaska Occupational Safety and Health STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Alaska civil rights laws applicable to employers and other businesses: Alaska State Commission for Human Rights (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Alaska to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Alaska SBDC (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Alaska state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Alaska. Since new sites are appearing frequently, you might also want to search for other Alaska government Web sites by using one of the popular Internet search engines, such as Google, AltaVista, or Yahoo. To start your Internet search for Alaska government information, you may want to begin with the following Internet sites: U.S. Small Business Administration: The State of Alaska home page: Alaska Department of Revenue (state tax information and tax forms): Division of Corporations, Business, and Professional Licensing (For corporate, LLC, limited partnership and fictitious business name filings or registration, plus business and professional licensing): Department of Labor and Workforce Development (For information, required posters, and forms regarding the state minimum wage/hour laws, workers' compensation, unemployment insurance tax, and workplace safety consultations and compliance): Department of Commerce, Community and Economic Development, Office of Economic Development (assistance and information for businesses starting up or expanding in Alaska): Alaska Human Rights Commission (information on Alaska employment discrimination laws, including posters): (d) Financing Sources. A number of public and private loan sources are available that can provide financial assistance or funding to your business. Some of the major Alaska financing sources you may want to contact include: Alaska Industrial Development and Export Authority (Offers long-term financing for capital investment and bank loan guarantees.) Division of Investments (Loan programs, such as the Commercial Fishing Revolving Loan Fund and the Fisheries Enhancement Loan Program, making loans up to $10 million for fish hatchery facilities.) For general information on development or financial assistance programs in Alaska, contact the Division of Economic Development of the Alaska Department of Commerce, Community and Economic Development, at the address listed above for that agency. If you are interested in seeking federally guaranteed loans through the U.S. Small Business Administration (SBA), contact the SBA's Alaska office at: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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