Franchise tax is a state-level tax imposed on businesses for the privilege of doing business or existing as a legal entity in a state. Unlike income taxes that are based solely on profits, franchise taxes are often owed regardless of whether a business is profitable, and may be calculated based on net worth, capital stock, or other accounting measures.
In some states, franchise tax is reported on a combined return with state income tax; in others, it's filed separately. A number of states impose similar taxes under different names, such as "business privilege tax," "annual license fee," or "net worth tax."
The meaning and implementation of franchise tax varies widely by state and entity type:
California imposes a corporate franchise tax that is reported on Form 100, the combined "California Corporation Franchise or Income Tax Return," rather than on a separate franchise-tax-only filing.
LLCs in California pay an $800 "annual LLC tax" that the state treats as a prepaid tax for the privilege of doing business. It's reported on LLC-specific forms (such as Form 568 and payment vouchers) rather than on the corporate Form 100, and is separate from the owners' income tax filings.
Wisconsin imposes both a corporate income tax and a corporate franchise tax, but a corporation pays only one of them in a given year.
Both are reported on the same Wisconsin franchise or income tax return and use net income as the base, so in practice the franchise tax looks very similar to an income tax even though it is legally a tax on the privilege of doing business in Wisconsin.
Wisconsin also requires separate annual reports with the Department of Financial Institutions. These resemble compliance filings but are not tax returns or labeled as franchise tax filings.
Delaware requires corporations to pay an annual franchise tax based on either authorized shares or assumed par value capital, whichever method results in the lower tax. This is one of the most well-known franchise taxes due to the large number of corporations incorporated in Delaware.
We've written detailed guides on each state's franchise tax filings.
Missing franchise tax filings is one of the most common reasons entities fall out of compliance. The due dates are difficult to track, the requirements are ambiguous, the filings themselves are complex, and they sit in the gray area between whoever handles your other state filings and your tax accountant. To make matters worse, registered agents typically avoid supporting franchise tax filings.
Although we recommend that you have your tax accountant assist in preparing and filing any franchise tax filings you may need to complete, Discern provides a variety of product features to make sure you never miss a franchise tax filing:
Discern customers can digitally file their Secretary of State annual reports and Delaware franchise tax directly from the product, in minutes. We also notify you when other franchise taxes are due, and provide guidance, links to the filings themselves, and a place to track the filings.
Ready to streamline your compliance obligations? Try Discern today.
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