Franchise Tax

What is franchise tax?

There are various requirements when forming a business in any state, from submitting registration documents and annual reports to paying state taxes. One such tax that may be required is franchise tax, which is a tax levied for the privilege of being registered or doing business in the state. 

Not all states require franchise tax, but those that do may have slight variations of the name, like business privilege tax or corporate franchise tax. Additionally, franchise tax obligations vary by state: 

• Franchise tax amount. The franchise tax rate could be a flat fee or calculated based on a percentage of a business’s net worth, value of capital stock, or value of real or personal property in the state. It's usually paid annually. 
• Business entity. C corporations and other entities, like limited liability companies (LLCs) and S corporations, are often required to pay franchise tax and submit a franchise tax report or franchise tax filings. Sole proprietorships and partnerships are usually not subject to the tax. 
• Tax due date. Annual franchise tax deadlines may be on the same date for all businesses or could be based on a business’s registration date.

FAQs 

Which states charge franchise taxes?

The states that charge franchise taxes are Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, Missouri, Minnesota, Nevada, New Hampshire, New York, North Carolina, Oklahoma, Tennessee, Texas, Vermont, and the District of Columbia. The and the franchise tax rates and the types of business entities required to pay franchise taxes vary from state to state. 

Can I write off the franchise tax fee?

You may be able to write off your state franchise tax fee for federal income tax purposes. Consult a tax professional who can provide expertise on what expenses are deductible. 

Is franchise tax the same as income tax?

Franchise tax and income tax are not the same things. Franchise tax is a state tax levied for the privilege of doing business in that state, while state income tax is a tax on a business’s income, specifically corporations and businesses electing to be taxed as a corporation. Corporate income tax is levied at both the federal and state levels—although not all states levy this type of tax. 

How does franchise tax work?

Franchise tax works differently across states, with some enacting a flat fee or minimum franchise tax regardless of entity type or income and others requiring a calculation of the percentage of a business’s net worth, value of real or personal property in the state, or capital stock. Oftentimes, this tax is paid upon submissal of an annual franchise tax report or the business’s annual report. States may impose financial penalties for unpaid taxes.