Franchise taxes affect more than just franchise owners. Read more about the state tax responsibilities of companies here.
What you’ll discover:
What exactly are franchise taxes?
When do franchise taxes become due?
Where should I pay my franchise taxes?
What is the structure of franchise taxes in various significant states?
Is it possible to escape franchise taxes?
What if I fail to pay my franchise taxes?
Franchise taxes are often perplexing, in part because the word itself may be deceptive. It is not a levy levied just on franchisors and franchisees. Even if you are neither a franchisor or franchisee, you may be required to pay franchise taxes to one or more states. Continue reading for answers to some of the most frequently asked franchise tax issues.
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What exactly are franchise taxes?
Franchise taxes, sometimes known as “privilege taxes,” are essentially a charge paid to a state for the right of establishing or doing business in the state. Franchise taxes, unlike income taxes, are often not dependent on the profitability of the firm. As a result, even if a company has no net income or a loss during the tax year, it may be obligated to pay franchise taxes.
Franchise taxes vary greatly from one state to the next. There is no franchise tax in several states. In places where a franchise tax exists, it may be charged as a flat fee, a fee based on the company’s gross sales, a fee based on the company’s net value, or a cost based on some other computation. Nevertheless, some states refer to franchise taxes as something different, such as in Alabama, where franchise taxes are referred to as a “business privilege tax.”
Franchise taxes are sometimes mistaken with income taxes, although they are not the same thing. Businesses in many states are subject to either a franchise tax or an income tax. Yet, in other jurisdictions, such as Louisiana, the same firm may be subject to both a franchise tax and an income tax.
When do franchise taxes become due?
The due date for franchise taxes is determined by the state in which you pay franchise taxes and the sort of company you run. If you haven’t already founded your company, you should check into the incorporation procedure as soon as feasible.
For example, Delaware business franchise taxes are payable on March 1 each year. Delaware limited liability firms must pay franchise taxes on June 1 of each year. Every year on May 15, Texas franchise taxes are due. Several states, such as Missouri, base the franchise tax due date on the business’s tax year (the 15th day of the fourth month from the beginning of the business period in the case of Missouri).
It is critical to understand the franchise tax laws in each state where your firm is registered or does business. For help with identifying whether and when your firm is needed to pay franchise taxes, you may wish to consult to a small business tax specialist.
Where should I pay my franchise taxes?
If your company is obligated to pay franchise taxes, you must do so to the relevant state agency where your company is registered or does business. If your company is registered or does business in more than one state, you may be obliged to pay franchise taxes in each state.
What is the structure of franchise taxes in various significant states?
The rules governing franchise taxes differ widely from state to state. Some of the most difficult states are Delaware, California, New York, Georgia, North Carolina, and Illinois. Check the table below for information on franchise taxes in these states.
Franchise taxes must be paid by Delaware companies by March 1 of each year. Each year, Delaware limited liability firms and limited partnerships must pay franchise taxes by June 1st. Each year, Delaware businesses pay a minimum of $175 in franchise tax, although the amount may be substantially more depending on the corporation’s circumstances. Every year, Delaware limited liability firms and limited partnerships pay a $300 franchise tax.
Businesses in California must pay an annual franchise tax of $800. The minimum yearly franchise tax for California companies is $800, however it may be greater based on the corporation’s net revenue. The California franchise tax due date varies according to the entity type and the end of the business’s fiscal year.
New York has one of the most intricate franchise tax laws in the country. Corporations must determine and pay the highest calculated amount of franchise tax using several techniques. The New York franchise tax only applies to corporations, although the state also imposes a “filing fee” tax on limited liability firms and partnerships. The filing fee tax is analogous to the franchise tax.
Georgia imposes a net wealth tax, which is similar to a franchise tax. The Georgia net worth tax might be as much as $5,000 per year, depending on the net value of the firm. The due date for paying the net worth tax varies depending on the company type and tax year. In Georgia, some limited liability firms are exempt from the net worth tax.
North Carolina has a corporate franchise tax, with a minimum annual franchise tax of $200. Unless the firm runs on a fiscal tax year, the due date for most companies to pay their franchise taxes is April 15.
In 2019, Illinois passed legislation to remove its franchise tax by January 1, 2024. Nevertheless, new legislation in 2021 resurrected the Illinois franchise tax and canceled its anticipated removal. There are many methods for determining an Illinois franchise tax, and the amount owing may vary based on the method utilized.
Is it possible to escape franchise taxes?
If your company is registered or operating in a state that has a franchise tax, you must pay it if you fulfill the particular conditions of that state. Bear in mind that not all firms are subject to a franchise tax in all states. For example, Texas has a franchise tax, but no franchise tax is owed if the entire income of the firm is less than $1,230,000.
What if I fail to pay my franchise taxes?
If your company fails to pay franchise taxes to a state in which it operates on schedule, the state may levy penalties and interest until the franchise taxes are paid. The state is likely to send you notifications until the franchise tax, as well as any fines and interest, is paid. If the franchise tax is not paid on time, you may risk a tax lien.
Failure to pay your company franchise taxes may also result in your firm losing its legal status in the state where the payments are due. If your company’s legal status deteriorates, it may lose its capacity to do business in the state or engage into legally enforceable contracts. The proprietors of the firm may also lose their limited liability protection, which means they may be personally responsible for debts or litigation filed against the company.
It might be difficult to determine how much franchise tax to pay and when to pay it. Franchise taxes may vary greatly depending on the kind of company, the tax structure, and the firm’s net value.