The "franchise tax" is not a fancy tax, unlike its name. It is a tax that states assess corporations and business entities for the privileges of incorporating or conducting business in their respective states. These taxes are not imposed by the state income tax that most states impose upon corporations and other companies.
Franchise taxes are an option in many but not all states. Nevada is one state that does not allow franchise taxes. Some states have a tax that exempts certain types of businesses from it. These could be non-profit corporations, fraternal associations, or some LLCs. Some states also exempt a smaller company from the tax.
Different states have different franchise tax rates. For example, some have an all-inclusive franchise tax, while others have a graduated rate. In addition, some states change the tax rate according to the type and business of the entity.
Franchise taxes should be paid annually, sometimes at the same tax time as other state taxes.
What is a Franchise Tax?
A franchise tax simply means that a state charges a business tax for doing a business in the state. Each state's franchise taxes are different and may be combined with or instead of small business tax or income tax. As a result, many details differ between states, including how the tax is calculated and which businesses must pay it.
A franchise tax is a charge to businesses in or incorporated within a particular state. Companies may be charged tax simply for owning property in the state. You should check the specific franchise tax requirements in your state.
Note that sometimes a franchise or privilege tax is also known as a franchise fee. It is levied on businesses to do business with a particular state. A franchise tax is not dependent on profit. However, it is mandatory for businesses, regardless of profitability.
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Who has to Pay Franchise Taxes?
Franchise taxes are typically required for all businesses that register with a state. However, the franchise tax isn’t usually required for businesses operated by just one person or sole proprietors.
The United States Small Business Administration will help you determine if you have to register your business. Registering with the State makes your company a separate business entity. Therefore, it is not necessary for small businesses. Also, according to SBA, you don't have to have a legal name.
Clear and precise information about the business' location is necessary to determine whether it needs to be registered.
Which States have a Franchise Tax?
Only some states require that businesses pay franchise taxes. These taxes can be added to the other state taxes. Washington D.C. also imposes a franchise fee.
Is it Possible to Eliminate Franchise Taxes?
The West Virginia franchise tax for business was eliminated in 2015. Likewise, Kansas' franchise tax was eliminated from West Virginia in 2015. It was also eliminated from Missouri and Pennsylvania.
A franchise tax differs from the standard business income tax paid each year when filing taxes. The IRS offers helpful information on its website. It shows income tax details for different business structures, including limited liability companies and partnerships, at a federal level.
How Much Franchise Tax do I have to Pay and How do I Calculate it?
The rates of franchise taxes are subject to different variables from state to state, just as the rules surrounding other taxes. In addition, these taxes will vary depending on where and what kind of business you own. That's why it is so important to learn the specifics of your state's franchise tax.
In some states, the franchise tax is a flat-rate rate. This makes the calculation simple depending on the type and size of your business. To calculate tax, you can use a percentage of the business's net worth, gross receipts of business for the tax period, and a percentage of the assets. However, it is not related to any company’s income in a given fiscal year.
A Delaware corporation has one the highest rates among all states that collect it. There is a $175 franchise tax. It can be used to calculate the total tax. Non-stock-for-profit businesses will pay $175. Companies can also calculate Delaware franchise taxes using the Authorized Shares Method (or the Assumed Par Value Capital Method). You can see the details on the Delaware Division of Corporations’ website. Some methods have a lower minimum than others.
Most states have calculators or detailed instructions on calculating specific taxes on their websites. Delaware is one example. Each state calculates its tax differently, so it is a good idea to double-check the information before you file. New York, for instance, requires that business owners calculate the tax multiple times before paying the highest rate.
Who Collects Franchise Tax?
Tax collection, too, varies from one state to another. Depending upon where you are paying the franchise fee, different departments within your state government may be responsible for collecting that tax.
The Comptroller's Office manages tax collection in Texas. The franchise taxes are described as "a privilege tax imposed on every taxable entity formed in Texas or doing business there." On the other side, California's Franchise Tax Board is responsible for collecting the tax.
What are the Legal Consequences of Not Paying the Franchise Tax?
Failure to pay the franchise fee can result in severe penalties that impact your business. Failure to pay taxes may notify the department responsible for collecting them. If you fail to pay your tax, you could be subject to a tax lien. This is an excellent opportunity to establish a payment schedule to start repaying what you owe.
Failure to pay the franchise tax may result in a business losing its legal standing. For example, they may lose their right to file lawsuits or take part in any legal action.
If the franchise tax is not paid, it could result in an LLC losing its protections. If this happens, owners or management could be financially liable.
When is the Franchise Tax Due?
Franchise taxes must be paid every year. However, it differs from one state regarding the rates and which businesses are responsible for when franchise taxes are due.
There is a strict deadline for franchise taxes, as with other taxes. If you miss it, late fees will apply. Some states have specific due dates. It depends on what type of business you run. For corporations in Delaware, the due date is March 1, and for LLCs, it is June 1. It may be due in other states on the 15th (or fourth) day of the third/fourth month of the tax calendar.
Bottom Line
Sometimes, the date can be the anniversary of the company's formation and not the tax due date. This would result in the tax due being paid in the same month as the business anniversary.
The website for your state will provide information about due dates for tax. States have their deadlines, usually found on the same website detailing the tax. Deadlines for extensions are also available online.
