Franchise & Excise Tax
Franchise & Excise Tax
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You must register for and pay franchise and excise taxes if you are a corporation, limited partnership, limited liability company, or business trust chartered/organized or conducting business in any state. The franchise tax is calculated using the greater of your net worth or the book value of your real or tangible personal property. The excise tax is calculated based on the tax year’s net earnings or income.
What Is a Franchise Tax?
The word franchise tax refers to a levy that some businesses must pay in order to conduct business in certain states. It’s also known as a privilege tax because it allows a company to be chartered and/or operate in that state. Companies in some states may also be liable for the tax even if they are chartered in another state. Despite the name, a franchise tax is not a tax on franchises and is separate from federal and state income taxes that must be filed annually.
Franchise Tax Rates
It is not an income tax since franchise taxes do not replace federal and state income taxes. These are charges in addition to income taxes. They’re normally paid once a year, at the same time as other taxes. The amount of franchise tax varies substantially based on each state’s tax regulations. Some states determine the amount of franchise tax due based on an entity’s assets or net worth, while others consider the value of its capital stock. Other states, on the other hand, may levy a flat fee on all enterprises operating within their borders or base their tax rate on the company’s gross receipts or paid-in capital.
What Is an Excise Tax?
The excise duty is a statutory tax imposed at the point of sale on specified commodities or services such as fuel, cigarettes, and alcohol. Excise taxes are domestic taxes levied inside a government infrastructure, as opposed to international taxes levied over national boundaries. Motor fuel, airline tickets, cigarettes, and other products and services are frequently subject to a federal excise tax.
How an Excise Tax Works
Business excise taxes are the most common type of excise tax. The expense of excise taxes may or may not be visible to consumers. Merchants pay a large portion of excise taxes, which they subsequently pass on to customers in the form of increased pricing. Merchants pay excise taxes to wholesalers and factor them into product pricing, raising the entire retail price. Some excise taxes, such as property taxes and excise taxes on some retirement account transactions, are paid directly by the customer.
Excise taxes can be imposed by the federal, state, or municipal governments. While income taxes are the largest source of revenue for both the federal and state governments, excise taxes account for a modest percentage of overall revenue.
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