Most of us are familiar with payroll tax, income tax, and self-employment taxes which are common tax terms and are easy to understand. Franchise tax on the other hand is an often-misunderstood tax due to its name. It’s far from what its name implies because you won’t be charged with this tax for franchising a favorite fast-food chain or coffee shop. This tax is imposed on most businesses for having the privilege to exist and operate within a specific state.
What is Franchise Tax?
Franchise tax is a state level tax levied on corporations and other registered business entities, such as LLCs (limited liability companies) and S corporations, for doing business within their jurisdiction. Also known as privilege tax, it is a fee that businesses must pay for having the legal right to operate within a state.
Sole proprietorships and partnerships, unless registered as an LLCs, are exempt from franchise tax.
How is Franchise tax Computed?
Franchise tax computation varies per state. There are states that use a business’ net worth, assets, gross receipts, net income, capital stocks or a combination of these basis in calculating franchise tax. Some states will make you figure state tax using different methods and make you pay the highest outcome while some states simply ask for a flat fee as franchise tax.
It is important to understand that franchise tax is not an income-related tax. A state will impose it whether the business produced net income or has suffered a loss.
Do all states have franchise tax?
There are only several states that impose franchise tax. Some states who used to have it have eliminated their franchise tax laws to encourage economic growth. Currently, the following states impose franchise tax:
- Alabama
- Arkansas
- California
- Delaware
- Georgia
- Illinois
- Louisiana
- Mississippi
- New York
- North Carolina
- Oklahoma – until tax year 2023
- Tennessee
- Texas
Franchise tax must be paid annually with deadlines that also vary from state to state. In most states, it has the same April 15 deadline as the annual federal income tax payments. While some are due as early as March 15 or as late as June. Some states require franchise tax to be paid on or before the business anniversary.
Businesses who fail to pay franchise tax may be subject to penalties and interests. Prolonged nonpayment of franchise tax can even cost them their legal right to operate their business.
It is important to stay informed and check the franchise tax requirements in each state where you operate to ensure compliance and avoid penalties.
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