Franchise tax

What is franchise tax?

Franchise tax is a state-level business tax imposed on businesses and for-profit corporations to operate or be chartered in the state. The tax is also referred to as a privilege tax and is separate from federal and state income taxes. Franchise tax varies from state to state and by business structure and can be levied based on the company’s net worth, the value of the company’s assets, as a percentage of gross receipts, or as a flat fee. 

The primary purpose of franchise tax is to generate revenue for the state. Failure to pay can result in penalties and interest charges or an inability to conduct business within the state.

Who is subject to franchise tax?

Entities typically subject to franchise taxes include C corporations, S corporations, partnerships, LLCs, and single-member limited liability companies (SMLLCs). 

Generally, companies must pay franchise taxes based on the states in which they are registered and operating. Should an entity conduct business in multiple states, it will be subject to the state-level tax in those states in which it is registered. 

Are there franchise tax exemptions?

Yes, there are exemptions to franchise tax. Entities generally not required to pay franchise taxes include:

• Sole proprietorships, except for single-member LLCs. Sole proprietors are not formally registered in the state where they do business and are not separate legal entities. Therefore, they are not subject to franchise taxes.
• Nonprofit organizations. Given their tax-exempt status, nonprofit organizations are usually not required to pay franchise taxes.
• Small businesses that fall below an asset or revenue threshold. In some states, the small business may be granted an exemption or reduced tax rate to provide that entity with some tax relief.
• Unincorporated political committees. 
• Real estate entities. Often exempt, these entities include certain qualified real estate investment trusts (REIT) and real estate mortgage investment conduits (REMIC).
• General partnerships. When direct ownership is composed entirely of natural persons, except for limited liability partnerships, they are not required to pay franchise taxes.
• Trusts qualified under Internal Revenue Code Section 401(a).
• Trusts exempt under Internal Revenue Code Section 501(c)(9).
• Certain escrows, estates of natural persons, and grantor trusts.

How is franchise tax calculated?

Franchise tax calculation varies from state to state and by business structure. However, there are several methods commonly used to determine franchise taxes. These include:

• Flat franchise tax rates or fixed fees. In some states, businesses must pay a flat franchise tax rate or a fixed fee for franchise taxes. The taxes are often levied uniformly on businesses within certain categories. For instance, a small business might pay a flat rate of $400 each year, while larger business entities are subject to higher rates based on criteria like number of employees or industry.
• Percentage of gross receipts. In some states, franchise tax is calculated as a percentage of a company’s gross receipts. This method is based on total revenues generated by the company before expenses are deducted. For example, if a state charges 0.7% in franchise tax on gross receipts, a company with $1 million in revenue would be subject to $7,000 in franchise taxes.
• Net worth or value of capital stock. Some states may impose franchise taxes by calculating a company’s net worth — the difference between its total assets and liabilities — or the value of its capital stock. For example, a state levies a tax rate of 0.2% on a company’s net worth, with a minimum threshold that all business entities must meet.
• Combination of methods. In some states, a combination of the above methods may be used to determine the franchise taxes owed by a business. This process enables them to account for variations in business structure and size.

What is an example of franchise tax?

Franchise tax can be complex. To better understand how franchise taxes are levied, consider the following examples:

California

In California, every corporation that is incorporated, registered, or doing business in California is subject to an $800 minimum franchise tax. If the corporation’s annual state net income multiplied by the appropriate tax rate — 8.84% for C corporations and 1.5% for S corporations — is greater than $800, they must pay that amount instead of the $800 minimum, according to California’s Franchise Tax Board. 

However, the state does waive the minimum franchise tax requirement for newly incorporated or qualified corporations in their first taxable year.

Mississippi

In Mississippi, most corporations doing business in the state are subject to franchise tax. The rate is $2.50 per $1,000 of the value of the capital used, invested, or employed in the state. 

The tax base includes capital stock issued, along with outstanding, surplus, and undivided profits and true reserves. However, the tax base must not be less than the corporation’s assessed value of real and tangible personal property in the state.

For multistate corporations, capital is apportioned to Mississippi on a formula or ratio basis. 

Texas

In Texas, the franchise tax is levied annually by the Texas Comptroller on taxable entities formed in the state or doing business in the state that make more than $2.47 million in annual revenue. These include, but are not limited to: 

• Corporations
• LLCs 
• SMLLCs 
• Series LLCs 
• Partnerships — general, limited, and limited liability 
• S corporations 
• Business associations 
• Joint ventures

According to the state, the franchise tax is based on a taxable company’s margin. It is computed in one of the following ways unless a taxable entity qualifies and chooses to file using the EZ Computation report form:

• Total revenue times 70%
• Total revenue minus cost of goods sold (COGS)
• Total revenue minus compensation
• Total revenue minus $1 million

Which states impose a franchise tax?

While the names — as well as the calculation methods — can vary by state, the states that impose a franchise tax of some form include:

Alabama. The state has a Business Privilege Tax. The tax is calculated on net worth plus additions, minus exclusions, times the apportionment factor, less the deductions, which equals taxable net worth.

Arkansas. The state requires all corporations, LLCs, banks, and insurance companies registered in Arkansas to pay an annual franchise tax.

California. Every corporation that is incorporated, registered, or doing business in California is subject to an $800 minimum franchise tax.

Delaware. Any corporation that is incorporated in Delaware, regardless of where it conducts business, is required to pay franchise tax.

Georgia. The state has a net worth tax, which is based on the net worth of a corporation, levied in exchange for the privilege of doing business or exercising a corporate franchise in Georgia. 

Illinois. The state requires all for-profit corporations to pay a franchise tax. As explained in the state’s Domestic Corporation Annual Report, entities can choose the method by which they calculate the franchise tax.

Louisiana. That state levies an initial corporation franchise tax of $110. After that, the franchise tax is $2.75 for each $1,000 or major fraction of more than $300,000 of capital employed in Louisiana.

Mississippi. Most corporations doing business in the state are subject to franchise tax. The rate is $2.50 per $1,000 of the value of the capital used, invested, or employed in the state.

Nebraska. The state levies an occupation tax on corporations that are incorporated in Nebraska or are doing business in the state. For entities incorporated in the state, the tax is levied based on the amount of paid-up capital stock of the corporation. The tax is collected biennially, in even-numbered years only.

New York. The state imposes a franchise tax on general business corporations that are incorporated both inside and outside of the state.

North Carolina. In the state, all domestic corporations and all foreign corporations with a Certificate of Authority to do business — or are, in fact, doing business in the state — are subject to franchise tax.

South Carolina. For the privilege of doing business as a corporation within the state of South Carolina, the state levies a license fee, or franchise tax, that is based on the capital stock and paid-in or capital surplus of the corporation or gross receipts and property in the state. The fee to be paid depends on the type of business. Furthermore, city and county governments may also impose a business license tax for operating a business within the corporate limits of the city or county.

Texas. The state levies a franchise tax on taxable entities formed in the state or doing business in the state that make more than $2.47 million in annual revenue. The tax is based on a taxable company’s margin.

Wisconsin. The state of Wisconsin has a franchise tax as well as an income tax. However, for the privilege of doing business in Wisconsin or exercising its Wisconsin franchise, only one tax is imposed against a corporation in a taxable year. While the provisions of the franchise and income taxes are very similar, a key difference is that federal obligations are subject to franchise tax but not income tax. Both domestic — those organized under Wisconsin law — and foreign corporations are subject to franchise tax.

Is franchise tax separate from state income tax?

Franchise tax is separate from state income tax. The tax is typically based on factors like net worth, value of capital stock, or gross receipts, regardless of profitability. State income taxes are determined by applying a tax rate to an entity’s state-taxable income. 

So, unlike state income taxes, companies doing business in states with franchise tax will be required to pay it even if they report a loss.

Are franchise taxes deductible?

Franchise taxes are generally deductible as a business expense on the federal corporate income tax return. This is because the IRS allows deductions for certain business expenses that are deemed necessary and ordinary.

However, depending on the jurisdiction, businesses may need to meet certain eligibility criteria and make estimated tax payments to comply with local tax authority mandates.

It is important to note that some states may offer deductions, tax credits, or other incentives. For instance, Texas offers the following franchise tax credits:

• Temporary Credit for Business Loss Carryforwards under Texas Tax Code Section 171.111 
• Research and Development Activities Credit under Texas Tax Code Chapter 171, Subchapter M 
• Certified Historic Structures Rehabilitation Credit under Texas Tax Code Chapter 172 

When is franchise tax due?

The due date for franchise tax varies by state and may also vary each year. In many instances, entities are required to file separate franchise tax returns in each state where they do business. Therefore, it is important to contact the proper tax authority within each state to confirm the due date and filing obligations.

What are the consequences for failure to pay?

The consequences of failure to pay franchise taxes can be severe and costly. The penalties vary by state, but the local government can generally impose fines and interest on unpaid taxes. These fines can range between 5% and 25% of the unpaid amounts.

Furthermore, companies failing to pay franchise tax can also have their license or charter suspended or revoked — and may even face criminal convictions.

We last updated this information on 04/30/2025.