Franchise Tax – What is it?

Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: September 15, 2021
Date Published: September 15, 2021

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.

franchise tax what is it

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.

franchise taxes

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:

AlabamaDelawareIllinoisMaryland
ArkansasGeorgiaLouisianaMississippi
CaliforniaIdahoMaineNebraska
New MexicoOklahomaTexasWashington DC
New YorkSouth CarolinaVermont (Optional)
North Carolina TennesseeWyoming

Alabama

Who should file/pay?Tax BaseDue Date
All Corporations, Limited Liability Entities (e.g. Limited Liability Company, Limited Partnership, Limited Liability Partnership) Disregarded Entity, Business Trust, Real Investment TrustBusiness entity’s net worth in Alabamasame as federal return

Tax Rate:

Tax BaseTax Rate (per $1 of net worth)
At leastless than
$10.00025
$1$200,0000.001
$200,000$500,0000.00125
$500,000$2,500,0000.0015
$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 BaseDue Date
All Corporations, LLC’s, Banks, and Insurance CompaniesFor 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 Stockson or before May 1 of each year
for everything else: Flat rate depending on the type of business

Tax Rate:

Corporations with Stock0.003 per $1 of Arizona capital stock; minimum $150
Corporations without Stock$300
Banks0.003 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 BaseDue 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 IncomeFor 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 $800For 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 corporations8.84%; minimum $800
S Corporation1.5%; 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 BaseDue Date
Corporations, and Limited Liability Entities (LLCs, LPs, LLPs)For corporations with stocks: number of authorized shares OR par value of issued sharesFor 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 stocksAuthorized 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 BaseDue Date
Corporations and LLCs that file as a corporationNet  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 leastNot ExceedingTax Due
100,0000
100,000150,000125
150,000200,000150
200,000300,000200
300,000500,000250
500,000750,000300
750,0001,000,000500
1,000,0002,000,000750
2,000,0004,000,0001,000
4,000,0006,000,0001,250
6,000,0008,000,0001,500
8,000,00010,000,0001,750
10,000,00012,000,0002,000
12,000,00014,000,0002,500
14,000,00016,000,0003,000
16,000,00018,000,0003,500
18,000,00020,000,0004,000
20,000,00022,000,0004,500
22,000,000————5,000

Idaho

Who should file/pay?Tax BaseTax RateDue Date
Corporations that are not subject to income taxnet income attributable to Idaho6.5% ($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 BaseDue Date
CorporationsPaid-in CapitalFirst 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 BaseDue Date
Any corporation or entity taxed as a corporationCapital employed in Louisiana15th day of the fifth month of the taxable year

Tax Rate:

Tax BaseTax 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 BaseDue Date
all financial institutions with Maine income, even if the entity is organized as a pass-through organizationOption 1: Maine Income and Maine Assets15th day of the fourth month following the close of the taxable year
Option 2: Maine Assets

Tax Rate:

Option 11% of Maine Income + 0.008% Maine Assets
Option 20.039% of Maine assets

Maryland

Who should file/pay?Tax BaseDue Date
public service companies (e.g. gas, electric, telephone, etc.)Gross receipts derived from business in MarylandApril 15

Tax Rate:

In general2%
Eletric companiesadditional 0.00062 per kilowatt-hour charge
Gas companiesadditional 0.00402 per therm charge

Mississippi

Who should file/pay?Tax BaseDue Date
CorporationsWhichever is higher of the value of the capital employed in Mississippi -or- assessed property values in Mississippi15th 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 BaseDue Date
CorporationsNet worthMarch 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 BaseTax RateDue Date
CorporationFlat rate$50same time as the corporate income tax is due

New York

Who should file/pay?Tax BaseDue Date
CorporationsThe higher of Business Income, Business Capital, or Fixed Dollar Amountfor 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 Income6.50%
-or-
Business Capital0.25%
-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 BaseDue Date
Corporations and LLCs that file as a corporationNet worth15th 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 BaseDue Date
CorporationsCapital employed in Oklahoma; only applicable to corporations with capital of $201,000 or moreJuly 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 BaseDue Date
CorporationsCapital and Paid-in Surplus15th 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 BaseTax RateDue Date
Corporations and Limited Liability Entitieswhichever 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 BaseDue Date
Corporations and Limited Liability Entitiesleast of the following: 70% of total revnue; total revenue less cost of sales; total revenue less compensation; total revenue less $1millionMay 15

Tax Rates:

if tax base is not more than $1,1180,00exempted
retail or wholesale0.38%
other than retail or wholesale0.75%
EZ Computation Rate (total revenue is greater than $20million)0.33%

Wyoming

Who should file/pay?Tax BaseDue Date
Corporations and Limited Liability EntitiesTotal assets located in Wyoming1st 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 BaseDue Date
Corporations and Limited Liability EntitiesNet income in Washington DCApril 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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  1. ftb.ca.gov "Franchise Tax Board" Page 1 . September 15, 2021

  2. law.cornell.edu "Franchise Tax" Page 1 . September 15, 2021

  3. comptroller.texas.gov "Franchise Tax" Page 1 . September 15, 2021

  4. revenue.delaware.gov "Franchise Taxes" Page 1 . September 15, 2021