Legal Alert: Don’t Forget To Pay Your Annual Business Entity Taxes

Josh Greenberg

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Many states require domestic corporations, limited liability companies, and partnerships to pay an annual tax, known as franchise tax for corporations and annual tax or annual filing fee for LLCs and partnerships, for the privilege to do business and exist as an entity under that state’s laws. Be aware that these annual taxes are distinct from income tax. Franchise taxes are calculated different ways, but are usually based on the corporation’s capitalization. For LLCs and partnerships, they are usually a flat fee. Taxes continue to accrue on a business entity until it files a document to officially terminate its existence, often with the secretary of state. Failure to file and pay by the specified deadline may result in a penalty fee and monthly interest, and if in arrears for several years, termination of existence by the state.

Delaware

Franchise tax on entities incorporated or formed under the laws of the State of Delaware are due for corporations on March 1 and for LLCs and partnerships on June 1. Corporations’ franchise tax may be calculated here and will be the lesser of the two amounts under the authorized shares and assumed par value capital methods, plus a $50 annual report filing fee. LLCs and partnerships pay a flat fee of $300. You can pay your franchise tax and file your annual report online. Failure to file by the deadline will result in a $125 penalty on corporations and a $200 penalty on LLCs and partnerships, with interest of 1.5% per month on late payments.

New York

Domestic corporations and foreign corporations authorized to do business in the State of New York, among other types of general business corporations, must pay an annual franchise tax either on/before April 15 if operating on a calendar taxable year or within three-and-a-half months after the end of the corporation’s tax year. The tax due is equal to the highest of the three following bases under this schedule of taxation rates, plus the metropolitan transportation business tax:

  1. Business Income: Federal taxable income minus investment income and other exempt income apportioned to New York State
  2. Business Capital: Total business capital allocated to New York State after deducing liabilities attributable to assets
  3. Fixed Dollar Minimum (FDM): Graduated schedule of flat fees based on New York State receipts

You can pay your franchise tax online.

LLCs and partnerships, both domestic and foreign authorized to do business in New York, must pay an annual filing fee based on the income derived from New York State sources determined by a graduated schedule of flat fees. The fee is due within three-and-a-half months after the end of the entity’s tax year, and is submitted along with a Form IT-204-LL.

Corporations, LLCs, and partnerships may request a six-month extension to file or will otherwise incur late fees, though failure to pay for two consecutive years may result in automatic dissolution.

California

Corporations incorporated or doing business in the State of California, whether or not qualified or registered under California law to do business there, must pay an annual franchise tax equal to the greater of (a) the corporation’s net income derived from California sources multiplied by the appropriate tax rate (8.85% for C corporations and 1.5% for S corporations) or (b) the $800 minimum franchise tax. Corporations are required to pay franchise taxes even if they are inactive, operating at a loss, or have only existed for less than one year by the filing date and are filing a short-period tax return. Franchise taxes must be paid and submitted with a Corporation Franchise or Income Tax Return (Form 100/100S) on or before either on/before April 15 if operating on a calendar taxable year or within four months and fifteen days after the end of the corporation’s tax year.

LLCs doing business in California and/or registered with the California Secretary of State are subject to an annual tax of $800, due within four months and fifteen days after the end of the corporation’s tax year, with an LLC Tax Voucher (Form FTB 3522). LLCs are also subject to an additional fee based on the LLC’s total income derived from California sources, determined by a graduated schedule of flat fees.

California automatically allows for a six-month extension, after which non-payment will result in penalties and interest.

See this resource from Parasec for a full list of annual report due dates across the 50 states.

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For more information calculating and paying your annual business entity taxes, contact your tax advisor or MG+ at info@masur.com or (212) 209-5450.