What Is Franchise Tax?
Franchise tax is a state-imposed fee for the privilege of doing business in that state—not based on income but on net worth, capital stock, or gross receipts. It’s often due annually, even if your business has zero income or is inactive.
IRC Reference and State Authority
While franchise tax is not governed by a specific federal IRC section, the requirement to report corporate and partnership activity federally under IRC §§ 6011, 6037, 6038, and 6038A indirectly connects with franchise tax compliance—especially when states cross-reference federal returns.
Each state enforces its franchise tax law under state statutes, such as:
- California R&TC § 23151
- Delaware Code Title 8, § 503
States That Levy Franchise Tax (2025)
| State | Tax Type |
|---|---|
| California | $800 minimum franchise tax (Form 100) |
| Delaware | Based on authorized shares or gross assets |
| Texas | Franchise tax on gross receipts (Form 05-158) |
| Illinois | Replaced by annual report fee in 2020 |
| Tennessee | Net worth-based franchise tax |
| Georgia, Alabama | Capital-based taxes |
Some states call it a “franchise tax,” others use terms like “business privilege tax” or “margin tax.”
Who Must Pay Franchise Tax?
You must pay franchise tax if your LLC, corporation, or LP is:
- Registered in a franchise-tax state
- Foreign qualified to do business there
- Earning or transacting business in that state
Even inactive companies may still owe minimum franchise tax.
How Franchise Tax Is Calculated
Each state uses its own method:
- Delaware: Based on either the Authorized Shares Method or Assumed Par Value Capital Method
- California: Flat $800 minimum or 6.65% of net income, whichever is greater (Form 100)
- Texas: Margin tax—Total revenue minus deductions x tax rate (typically 0.375% to 0.75%)
Common Franchise Tax Forms
| State | Form | Due Date (2025) |
|---|---|---|
| California | Form 100 | April 15, 2026 |
| Delaware | Annual Report + Franchise Tax | March 1, 2026 |
| Texas | Form 05-158 | May 15, 2026 |
Step-by-Step Guide to Franchise Tax Compliance
Step 1: Know Your State Requirement
Check if your business is registered or doing business in a franchise tax state.
Step 2: Identify Filing Frequency
Most states require annual filing, regardless of business activity or income.
Step 3: Determine Tax Calculation Method
Refer to your state’s department of revenue website or use tools like Delaware’s Franchise Tax Calculator.
Step 4: File the Correct Form
Use your state-specific franchise tax form, like CA Form 100 or TX Form 05-158.
Step 5: Pay On Time
Late filings usually incur penalties + interest.
Step 6: Maintain Good Standing
Failing to pay franchise tax may lead to loss of good standing, penalties, or even business dissolution.
Example: Franchise Tax Calculation (Delaware vs. California)
✅ Delaware Corporation
ABC Corp has 10,000,000 authorized shares.
Tax Due (Authorized Shares Method):
= $75 for first 5,000 shares
- $250 for next 5,000,000
- $85 for remaining shares
Total = $410
Or, if using Assumed Par Value Method with $500,000 gross assets, tax could be as low as $175.
✅ California LLC
XYZ LLC has zero income in 2025.
Still must file CA Form 568 or 100 and pay $800 minimum tax.
Conclusion
Franchise tax is often misunderstood. It’s not about income—it’s about compliance. Whether you made a dollar or not, you may still owe this annual tax. Missing it could lead to penalties or administrative dissolution. The good news? With proper planning and compliance tracking, you can stay in good standing—and avoid unnecessary fees.
CTA and Disclaimer
Confused about your state’s franchise tax? Don’t risk penalties.
Let’s get your LLC or corporation in good standing.
I’m Anshul Goyal, CPA EA FCA, licensed in the U.S. and admitted to practice before the IRS. I also advise startups and business owners on cross-state and cross-border franchise tax compliance.
📅 Schedule a consultation today — we’ll make sure you’re covered in 2025.
Top 5 FAQs – Franchise Tax
1. Do I have to pay franchise tax if my company made no money?
Yes. Many states (like CA and DE) require minimum franchise tax even for inactive companies.
2. Can I avoid franchise tax by forming in another state?
Not if you do business in a franchise tax state. You’ll still be liable for foreign qualification and taxes.
3. What happens if I don’t pay franchise tax?
Your business may lose good standing, face penalties, or be administratively dissolved.
4. Is franchise tax deductible?
Yes. Franchise tax is deductible as a business expense on IRS Form 1120/1065, under IRC § 162.
5. Which states don’t charge franchise tax?
Popular no franchise tax states include: Nevada, Wyoming, South Dakota, and Ohio (some exceptions apply).
Disclaimer
This blog is for educational purposes only and does not constitute legal or tax advice. Franchise tax laws vary by state and change frequently. Please consult a licensed CPA for state-specific filing obligations.