Franchise Tax – What is it?
Aside from federal taxes, a state may impose additional taxes on business entities that do business in it.
One of these taxes is the so-called Franchise Tax.
What is a franchise tax?
Do not be confused by the name!
A franchise tax is not a tax imposed on franchises such as McDonald’s, Burger King, and so on.
Rather, it is a tax imposed on certain business types that operate in a state.
Also known as a privilege tax, it is what businesses pay for the privilege of being able to do business in a state.
Whether your business is actually a franchise or not, it can still be liable for a franchise tax.
The rate of franchise taxes varies from state to state, and not all states impose a franchise tax.
Who is liable to pay a franchise tax?
It depends on the state, but typically corporations and limited liability entities (e.g. Limited Liability Company, Limited Partnership, Limited Liability Partnership) are subject to the franchise tax.
What if I don’t pay franchise tax?
If the state that the business entity is operating in does not impose a franchise tax, then there are no consequences to not paying.
However, if it is in a state that does impose a franchise tax, failure to pay will result in late fees, fines, penalties, or maybe even revocation of the right to operate legally in the state.
This means that a business entity that does not pay its franchise tax when required to do so may lose its right to file or maintain a lawsuit in a state’s court system.
Income Tax and Franchise Tax: Are they the same?
No. They are not the same, nor is franchise tax a substitute for income tax.
Income tax is a tax that is based on a business’s net income or profit, whereas franchise tax is not (in general).
That means that a franchise tax is payable whether a business generates profit or not, while an income tax is only payable when a business makes a profit.
Depending on the state, a franchise tax can be based on a business entity’s net worth, total revenue, or could even be a flat rate.
An income tax on the other hand will always be based on a business entity’s net income.
Finally, an income tax can be imposed on individuals or business entities.
Franchise taxes are only typically imposed on business entities.
Is franchise tax a deductible expense?
Yes. A franchise tax is deductible since it is a necessary cost of doing business.
Franchise Tax by State
As already mentioned, not all states impose a franchise tax on business entities.
As of this article’s publication, these are the states that impose a franchise tax:
Alabama
| Who should file/pay? | Tax Base | Due Date |
| All Corporations, Limited Liability Entities (e.g. Limited Liability Company, Limited Partnership, Limited Liability Partnership) Disregarded Entity, Business Trust, Real Investment Trust | Business entity’s net worth in Alabama | same as federal return |
Tax Rate:
| Tax Base | Tax Rate (per $1 of net worth) | |
| At least | less than | |
| $1 | 0.00025 | |
| $1 | $200,000 | 0.001 |
| $200,000 | $500,000 | 0.00125 |
| $500,000 | $2,500,000 | 0.0015 |
| $2,500,000 | ———— | 0.00175 |
*minimum amount of $100; maximum amount of $15,000 and $3million for banks & insurance Companies
Arkansas
| Who should file/pay? | Tax Base | Due Date |
| All Corporations, LLC’s, Banks, and Insurance Companies | For corporations and banks with stocks: Arizona capital stock; Arizona capital stock = Arizona Real & Personal Properties ÷ Total Real & Personal Properties x Total Par Value of Issued and Oustanding Stocks | on or before May 1 of each year |
| for everything else: Flat rate depending on the type of business | ||
Tax Rate:
| Corporations with Stock | 0.003 per $1 of Arizona capital stock; minimum $150 |
| Corporations without Stock | $300 |
| Banks | 0.003 per $1 of Arizona capital stock; minimum $150 |
| Banks without Stock | $300 |
| Limited Liability Company (LLC, PLLC) | $150 |
| Insurance Corporation Legal Reserve Mutual, assets less than $100 million | $300 |
| Insurance Corporation Legal Reserve Mutual, assets greater than $100 million | $400 |
| Insurance Company outstanding capital stock less than $500,000 | $300 |
| Insurance Company outstanding capital stock greater than $500,000 | $400 |
California
| Who should file/pay? | Tax Base | Due Date |
| C corporations that are not subject to corporate income tax, S corporations, and limited liability entities (e.g. Limited Liability Company, Limited Partnership, Limited Liability Partnership) | For corporations: Net Income | For C corporations: 15th day of the 4th month after the close of the taxable year |
| For S corporations: 15th day of the 3rd month after the close of the taxable year | ||
| For LLC, LP, LLP, and LLLP: flat rate of $800 | For LLC: 15th day of the 4th month after the beginning of the taxable year | |
| For partnerships: 15th day of the 3rd month after the close of the taxable year |
Tax Rate:
| C corporations | 8.84%; minimum $800 |
| S Corporation | 1.5%; minimum $800 |
| Limited Liability Entity (LLC, LP, LLP, LLLP) | $800 |
Delaware
For Delaware, the annual franchise tax is the total of the annual report fee and the actual tax due.
| Who should file/pay? | Tax Base | Due Date |
| Corporations, and Limited Liability Entities (LLCs, LPs, LLPs) | For corporations with stocks: number of authorized shares OR par value of issued shares | For Corporations: March 1; For Limited Liability Entities: June 1 |
| For non-stock/non-profit companies and Limited Liability Entities: flat rate depending on business type | ||
Tax Rates:
| Corporation with stocks | Authorized Shares Method | |
| 5,000 or less shares | $225 ($175 + $50 annual report fee) | |
| 5,001 – 10,000 shares | $300 ($250 + $50 annual report fee) | |
| more than 10,000 shares | $250 + $50 annual report fee + $85 for every 10,000 share or a portion thereof (maximum of $200,000 + $50 annual report fee) | |
| Assumed Par Value Capital Method | ||
| $400.00 per million or portion of a million of total par value of issued shares + $50 annual report fee (minimum of $400 + $50 annual report fee, maximum of $200,000 + $50 annual report fee) | ||
| Non-stock/Non-profit Company/Corporation | $25 (annual report fee) | |
| Limited Liability Entity | $300 | |
Georgia
| Who should file/pay? | Tax Base | Due Date |
| Corporations and LLCs that file as a corporation | Net worth on the first day of the corporation’s net worth taxable year;for foreign corporations, a portion of net worth employed in Georgia | the fifteenth day of the fourth month following the beginning of the corporation’s taxable period |
Tax Rate:
| At least | Not Exceeding | Tax Due |
| 100,000 | 0 | |
| 100,000 | 150,000 | 125 |
| 150,000 | 200,000 | 150 |
| 200,000 | 300,000 | 200 |
| 300,000 | 500,000 | 250 |
| 500,000 | 750,000 | 300 |
| 750,000 | 1,000,000 | 500 |
| 1,000,000 | 2,000,000 | 750 |
| 2,000,000 | 4,000,000 | 1,000 |
| 4,000,000 | 6,000,000 | 1,250 |
| 6,000,000 | 8,000,000 | 1,500 |
| 8,000,000 | 10,000,000 | 1,750 |
| 10,000,000 | 12,000,000 | 2,000 |
| 12,000,000 | 14,000,000 | 2,500 |
| 14,000,000 | 16,000,000 | 3,000 |
| 16,000,000 | 18,000,000 | 3,500 |
| 18,000,000 | 20,000,000 | 4,000 |
| 20,000,000 | 22,000,000 | 4,500 |
| 22,000,000 | ———— | 5,000 |
Idaho
| Who should file/pay? | Tax Base | Tax Rate | Due Date |
| Corporations that are not subject to income tax | net income attributable to Idaho | 6.5% ($20 minimum) | 15th day of the fourth month following the close of taxable year |
Illinois
For Illinois, the franchise tax will be gradually phased out starting January 1, 2020.
For 2020, the first $30 franchise tax liability will be exempt.
For 2021, $1,000.
For 2022, $10,000.
For 2023, $100,000.
Franchise tax will be totally phased out by January 1, 2024.
| Who should file/pay? | Tax Base | Due Date |
| Corporations | Paid-in Capital | First day of business’ anniversary month |
Tax Rate
| Paid-in Capital Method | -or- | The Allocation Factor Method |
| 0.15% of paid-in capital in Illinois on the first year; 0.1% of paid-in capital in Illinois for the proceeding years | Allocation factor X Total Paid-in Capital X 0.15% | |
| where Allocation Factor = (Total value of property owned in Illinois + total gross assets earned in Illinois from the previous year) ÷ (Total value of property owned + total gross assets earned from the previous year) |
*minimum amount of $25; maximum amount of $2million
Louisiana
| Who should file/pay? | Tax Base | Due Date |
| Any corporation or entity taxed as a corporation | Capital employed in Louisiana | 15th day of the fifth month of the taxable year |
Tax Rate:
| Tax Base | Tax Rate |
| $0 – $300,000 | $1.50 for every $1,000 or a fraction thereof |
| above $300,000 | $450 + $3 for ever $1,000 or a fraction thereof in excess of $300,000 |
| initial franchise tax | $110 |
Maine
| Who should file/pay? | Tax Base | Due Date |
| all financial institutions with Maine income, even if the entity is organized as a pass-through organization | Option 1: Maine Income and Maine Assets | 15th day of the fourth month following the close of the taxable year |
| Option 2: Maine Assets |
Tax Rate:
| Option 1 | 1% of Maine Income + 0.008% Maine Assets |
| Option 2 | 0.039% of Maine assets |
Maryland
| Who should file/pay? | Tax Base | Due Date |
| public service companies (e.g. gas, electric, telephone, etc.) | Gross receipts derived from business in Maryland | April 15 |
Tax Rate:
| In general | 2% |
| Eletric companies | additional 0.00062 per kilowatt-hour charge |
| Gas companies | additional 0.00402 per therm charge |
Mississippi
| Who should file/pay? | Tax Base | Due Date |
| Corporations | Whichever is higher of the value of the capital employed in Mississippi -or- assessed property values in Mississippi | 15th day of the 4th month following the close of the taxable year |
Tax Rate
$2.25 per $1,000 or a fraction thereof in excess of $100,000 ($25 minimum)
Nebraska
| Who should file/pay? | Tax Base | Due Date |
| Corporations | Net worth | March 1, delinquent April 15 (every even year) |
Tax rate:
The occupation tax (Nebraska’s franchise tax) rate is set by the city imposing it
New Mexico
| Who should file/pay? | Tax Base | Tax Rate | Due Date |
| Corporation | Flat rate | $50 | same time as the corporate income tax is due |
New York
| Who should file/pay? | Tax Base | Due Date |
| Corporations | The higher of Business Income, Business Capital, or Fixed Dollar Amount | for calendar year: On or before April 15; for fiscal year: Within 3 ½ months after the end of the reporting period |
Tax Rate:
| Tax Rate | |
| Business Income | 6.50% |
| -or- | |
| Business Capital | 0.25% |
| -or- | |
| For a corporation with New York State receipts of: | |
| Not more than $100,000 | $25 |
| More than $100,000 but not over $250,000 | $75 |
| More than $250,000 but not over $500,000 | $175 |
| More than $500,000 but not over $1,000,000 | $500 |
| More than $1,000,000 but not over $5,000,000 | $1,500 |
| More than $5,000,000 but not over $25,000,000 | $3,500 |
| More than $25,000,000 but not over $50,000,000 | $5,000 |
| More than $50,000,000 but not over $100,000,000 | $10,000 |
| More than $100,000,000 but not over $250,000,000 | $20,000 |
| More than $250,000,000 but not over $500,000,000 | $50,000 |
| More than $500,000,000 but not over $1,000,000,000 | $100,000 |
| Over $1,000,000,000 | $200,000 |
| *whichever is higher of the three | |
North Carolina
| Who should file/pay? | Tax Base | Due Date |
| Corporations and LLCs that file as a corporation | Net worth | 15th day of the fourth month following the close of the taxable year |
Tax Rates:
| C corporations | $1.50 per $1,000 or a fraction thereof ($200 minimum) |
| S corporation | $200 for the first $1million + $1.50 per $1,000 or a fraction thereof in excess of $1million ($200 minimum) |
Oklahoma
| Who should file/pay? | Tax Base | Due Date |
| Corporations | Capital employed in Oklahoma; only applicable to corporations with capital of $201,000 or more | July 1, delinquent September 15 |
Tax Rates:
| Domestic corporations | $1.25 per $1,000 or a fraction thereof ($20,000 maximum) |
| Foreign corporations | $100 (registered agent fee) |
South Carolina
| Who should file/pay? | Tax Base | Due Date |
| Corporations | Capital and Paid-in Surplus | 15th day of the fourth month after the end of the taxable year |
Tax Rates:
$15 + $1.00 for every $1,000 or fraction thereof ($25 minimum)
Tennessee
| Who should file/pay? | Tax Base | Tax Rate | Due Date |
| Corporations and Limited Liability Entities | whichever is the greater of the taxpayer’s net worth or the book value of real or tangible personal property owned or used in Tennessee | 0.25% ($100 minimum) | 15th day of the 4th month following the close of taxable year |
Texas
| Who should file/pay? | Tax Base | Due Date |
| Corporations and Limited Liability Entities | least of the following: 70% of total revnue; total revenue less cost of sales; total revenue less compensation; total revenue less $1million | May 15 |
Tax Rates:
| if tax base is not more than $1,1180,00 | exempted |
| retail or wholesale | 0.38% |
| other than retail or wholesale | 0.75% |
| EZ Computation Rate (total revenue is greater than $20million) | 0.33% |
Wyoming
| Who should file/pay? | Tax Base | Due Date |
| Corporations and Limited Liability Entities | Total assets located in Wyoming | 1st day of anniversary month |
Tax Rates:
| For-profit business | $60 or two-tenths of one million on the dollar ($.0002) |
| Non-profits | $50 |
Washington DC
| Who should file/pay? | Tax Base | Due Date |
| Corporations and Limited Liability Entities | Net income in Washington DC | April 15 |
Tax Rates:
8.25%, $250 minimum if DC gross receipts are $1million or less; $1,000 minimum if DC gross receipts are greater than $1million
Vermont
The State of Vermont has an optional franchise tax applicable only to digital business entities.
The tax rate is 0.2% on total assets or it could be based on the number of authorized shares of stock, with a minimum tax of $250 and a maximum tax of $500,000
As of this article’s publication, no one has availed of this optional franchise tax.
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ftb.ca.gov "Franchise Tax Board" Page 1 . September 15, 2021
law.cornell.edu "Franchise Tax" Page 1 . September 15, 2021
comptroller.texas.gov "Franchise Tax" Page 1 . September 15, 2021
revenue.delaware.gov "Franchise Taxes" Page 1 . September 15, 2021