Why your franchise tax obligations can’t be missed
The franchise tax, sometimes referred to as a business privilege tax, is what entities pay to conduct business in certain states. Not to be confused with business income taxes, franchise tax generally applies to profits and can be levied.
If your state imposes franchise tax, you simply must meet the required obligations to avoid financial penalties and other associated risks. Below you will read more about who is required to pay franchise tax as well as other important details you need to know.
Who pays franchise taxes?
Any organization doing business in a state that collects a franchise tax, other than those specifically exempted by the state, must pay the franchise tax whether the group is incorporated, registered or simply doing business in that state.
Some states charge a flat annual fee, some a tiered fee, and others a percentage based on the organization’s income or net worth. Note there is no federal franchise tax. Each state establishes its own due dates for franchise taxes, with most due annually. Often, an annual report must be filed along with the tax payment.
Consequences of missing payments
Given that many franchise tax levies are often modest some organizations may assume paying the tax is not critical. For example, Mississippi’s minimum tax is $25. But that’s not the case in every state. California requires filing a California Corporation Franchise or Income Tax Return and charges a minimum $800 franchise tax even if the business operates at a loss. Because of tax variations by state, you’ll need to be on top of it for every state you operate business. Organizations failing to file and pay applicable franchise taxes on time may:
Be fined
Be subject to a tax lien
Lose their ability to do business in that state
Lose legal standing to file lawsuits in that state
Some states charge penalties plus monthly interest. Take Delaware for instance. Delaware charges a $200 penalty plus 1.5% interest on a monthly basis which can add up. Again, this can vary by state so it’s important to know what your states requirements are.
Which states collect franchise taxes?
The following states levy a franchise tax:
In the past several years, Kansas, Missouri, Pennsylvania and West Virginia discontinued their franchise taxes. Illinois legislation began phasing out the Illinois franchise tax in 2020 but is scheduled to be repealed beginning tax year 2024.
Some states exempt not-for-profit, sole proprietorships and other entities from the franchise tax, but may still require an annual report. Anyone doing business in states that have a franchise tax should be aware of the rules, rates and due dates to avoid penalties and protect their ability to begin or continue doing business in those states. Talk to a tax advisor for more information.