Franchise tax

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Page written by Ashlyn Brooks. Last reviewed on July 22, 2024. Next review due October 1, 2025.

For businesses and consumers, taxes are a necessary part of life. Although many would choose to avoid them if given the option, they are a reality. Here at Swoop, we understand that funding a business comes with a heavy burden, one being possible specialty taxes.

Let’s discuss one of these instances: franchise tax, including what it is, who has to pay it, and what the rates are.

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What is franchise tax?

Franchise tax is a state tax levied on certain businesses for the privilege of operating within that state.

Despite its name, it is not exclusively related to franchises. This tax applies to various types of businesses, including corporations, partnerships, and limited liability companies (LLCs). The primary purpose of the franchise tax is to generate revenue for the state, contributing to public services and infrastructure.

Businesses are subject to franchise tax based on specific criteria set by the state. These criteria can include:

Net worth or capital: The tax may be calculated based on the company’s net worth or the amount of capital invested.
Gross receipts or revenue: Some states determine the tax based on a business’s gross receipts or revenue.

What are the franchise tax rates?

Unlike sales tax, Franchise tax varies significantly from state to state, and the calculation method can also differ. Here’s an overview of how some states approach franchise tax rates:

Texas: The Texas franchise tax is based on a company’s revenue, with a margin calculation. As of the latest rates, businesses with revenue of $1,230,000 or less pay no tax. For those above this threshold, the rates are 0.375% for wholesalers and retailers and 0.75% for other businesses.
California: In California, the franchise tax is a flat rate of $800 annually for most LLCs, regardless of their income. Corporations, however, pay either $800 or a percentage of their net income, whichever is greater.
Delaware: Delaware’s franchise tax is based on a company’s authorized shares or the assumed par value capital method. The minimum tax is $175, but it can go up significantly based on the number of authorized shares.

Businesses should consult their specific state’s tax authority or a financial advisor to understand the applicable rates and calculations.

For convenience, here is where you can find a list of 2024 rates by state from TaxFoundation.org

When are franchise taxes due?

Franchise tax due dates also vary by state and entity type. Here are some common examples:

Texas: Annual reports and franchise taxes are due by May 15th.
California: The annual $800 franchise tax for LLCs is due by the 15th day of the 4th month after the close of the tax year. For corporations, the due date coincides with their corporate income tax return.
Delaware: The franchise tax for corporations is due by March 1st each year.

Businesses need to track these dates to avoid penalties and interest for late payments.

How to file and pay franchise tax

Filing and paying franchise tax typically involves several steps:

Determine your tax obligation: Use the specific state’s guidelines to calculate your tax. Each state is different. However, you may receive a notice to your business address that’s on file with your estimated taxes. From here, it should include a place for you to pay online or a number to call.
Prepare the necessary forms: States usually provide forms or online portals for filing franchise taxes. For instance:
- Texas uses the “Texas Franchise Tax Report” form.
- California provides forms via the Franchise Tax Board’s website.
- Delaware allows online filings through its Division of Corporations website.
Submit your payment: Payments can often be made online, via mail, or through electronic funds transfer (EFT).

Swoop business tip:

Not every estimated payment is correct. Just because your business receives a payment notice in the mail does not always mean you owe money. Log in to your state’s website to investigate and confirm you indeed owe tax. For further help, contact a CPA or tax specialist.

What happens if you don't pay franchise tax?

Failing to pay franchise tax can result in severe consequences, including:

Penalties and interest: States impose penalties and interest on late payments. For example, Texas charges a 5% penalty on the unpaid tax, increasing to 10% if not paid within 30 days.
Loss of good standing: Not paying franchise tax can lead to a business losing its good standing status with the state. This can affect the ability to secure financing, enter into contracts, and other business operations.
Legal action: Persistent non-payment may result in legal actions, including the dissolution of the business.

If you feel like you’re unable to meet the payment deadline or unsure what you owe or where to pay, contact your state’s office for assistance. Don’t procrastinate, as it tends only to exacerbate the problem.

How Swoop can help

Here at Swoop, we pride ourselves on helping SMBs achieve growth and obtaining funding opportunities to make it possible.

For more information regarding what you’re eligible for or the funding options you have access to, visit our website or book a call with a funding professional.

Written by

Ashlyn Brooks

Ashlyn is a personal finance writer with experience in business and consumer taxes, retirement, and financial services to name a few. She has been published in USA Today, Kiplinger and Investopedia.

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