Business

How do franchise taxes work?

Franchise taxes

As the owner of a small business or startup, you can assume this Franchise taxes It will be the least of your worries. After all, your company is not a giant franchise like McDonald’s. However, this tax is not a tax on concession and rather just a general business tax for specific enterprises.

Let’s break it down.

What is a franchise tax?

State governments levy franchise taxes on corporations of all sizes to grant the said Corporation Charter to operate within that state. You may be required to pay franchise tax in a country in which you do not work but earn a large portion of your income.

It is paid along with income tax, but unlike income tax, it does not depend on the revenue the company generates. It’s also important to note that many states have recently chosen to abolish franchise taxes altogether.

Who Pays the Franchise Tax?

Nonprofits and some LLCs are exempt from franchise tax in most states, as are sole proprietorships and public partnerships. Different state governments have different royalty tax rates depending on their need to collect revenue and attract business.

There is no fixed formula for calculating the franchise tax that an entity owes, as the methodology varies from state to state. Some states calculate tax based on the assets the entity owns, while other regions calculate royalty tax based on the value of the company’s equity capital. Other states simply charge flat fees for any entity operating within their jurisdictions.

You can expect to pay franchise taxes in the following states: New York, Kansas, Tennessee, Oklahoma, Texas, Louisiana, Illinois, Delaware, Georgia, Alabama, North Carolina, California, Arkansas, and Mississippi. Four states, namely Kansas, Missouri, West Virginia and Pennsylvania, chose to abolish franchise taxes at various times between 2011 and 2015.

For example, if your corporation is based in Kansas but has outlets or hires employees in the states of Tennessee and Oklahoma, would you be required to pay franchise tax in the three states? This will depend on the tax rules for the specific state and whether your company is registered as a business in each state. If your entity is officially registered in all three states, it is likely that you will need to pay franchise taxes in all of those jurisdictions.

Unless your business is registered as a sole proprietorship or partnership where it has been assured that the members are individuals, you will be liable to pay the franchise tax. Some LLCs are exempt from this type of tax. Generally speaking, nonprofits and sister organizations are not expected to pay the franchise tax. Tax-exempt trusts under the Internal Revenue Code will also not be required to pay franchise tax.

Combing through the core details of a franchise tax can be cumbersome. You might end up counting tax expenses that you shouldn’t have to pay. Even if you are an accountant by profession, you may not be able to take the time to properly classify and present your tax liabilities. This is where outsourcing is Professional tax accounting services Come in handy.

How is the franchise tax determined?

Different states will have different methods of determining the franchise tax that the entity has to pay. Usually , Calculate the franchise tax It will take into account the net worth (asset value minus debt) of the entity, tangible assets, its inventory value, its total revenue (revenue without adjusting for expenses), and its income, in some cases. Some jurisdictions simply charge a flat fee as a franchise tax to any entity wishing to trade within the country.

If your business is registered in a state that imposes franchise tax, you will be liable to pay this for every year you work there. However, the lines become blurry when the entity operates in another state in terms of personnel or retail outlets but is not registered there. Whether or not you will be required to pay the franchise tax in those states will vary from state to state depending on their tax rules.

Stay on top of your franchise tax

It is just as important to pay as much attention to filing and paying your franchise taxes as it is with your income tax. Call the help of a trained tax professional if this process sounds a little vague. Besides evading any accompanying penalties, working on your franchise tax with a cash savings expert can help you in the event the government finds that this tax does not apply to you.

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