NYS Franchise Tax: Everything You Need to Know
NYS franchise tax is a government levy charged by New York State to certain types of businesses, including corporations.3 min read
NYS franchise tax is a government levy charged by New York State to certain types of businesses, including corporations. Businesses are subject to the state's franchise tax if they engage in certain types of activities regardless of whether they are registered to do business in New York.
The Pros and Cons of Owning a Business in New York
New York offers plenty of benefits for small-business owners. For starters, New York City is the center of the world economy, and all the most powerful economic engines are based in NYC. New York is also home to prestigious universities that send graduates into the business world every spring, giving you access to the best and brightest.
New York attracts all types of businesses, both foreign and domestic. While the state offers numerous benefits to business owners, there are a few negatives to consider.
For starters, New York's business tax code is costly and difficult to navigate. You may need to calculate taxes using several methods depending on the nature of your business. The state also requires you to use the tax method resulting in the highest tax bill. The most expensive tax treatment is reserved for C corporations, but even small businesses are subjected to intense taxation.
New York Taxes
Companies that operate in New York must comply with several different types of taxes with specific requirements reserved for their particular business activities. New York imposes a corporate income tax on both types of corporations, not to mention a tax on foreign and domestic companies that exercise their corporate franchise.
New York also taxes companies for:
- Doing business
- Employing capital
- Maintaining an office in New York
- Owning or leasing property
New York business owners are free to choose their preferred business structure, whether they prefer a limited liability company (LLC), partnership, sole proprietorship, S corporation, or C corporation. Keep in mind, however, that the business structure you choose determines how much you'll pay in taxes and fees, which will affect your business income.
New York Franchise Tax
Some small business transition to C corporations after expanding. While a corporation franchise tax is standard in most states, New York's franchise tax is more complex. The state wants to close loopholes that allow businesses to minimize their taxes, which is why the state imposes four different ways of calculating tax. Each method is calculated in a different way, and you must calculate taxes using each method and pay the highest amount of the four results. These four amounts are:
- The company's entire net income
- The company's minimum taxable income
- The company's business and investment capital
- A fixed dollar minimum tax
The easiest method is calculating tax based on net income, which equals the federal taxable income. A company's investment capital (minus any liabilities) may also be taxed. Another method is the minimum taxable income, calculated from net income plus some federal adjustments. Finally, the fixed dollar minimum method taxes companies on gross receipts, and charges set tiers a flat dollar amount.
New York corporate income tax is sometimes called a franchise tax. The state's corporation franchise tax applies to both types of corporations and a “filing fee” tax which applies to LLCs, partnerships, and limited liability partnerships (LLPs). If you receive income from your business, that income is also taxed on your individual New York tax return.
Foreign corporations are not subject to New York tax if they only engage in interstate commerce.
What is Income Tax?
Corporations in the United States use income tax return forms to report:
- Income tax liability
Foreign subsidiaries, shareholders and assets, including foreign bank accounts, must also be reported. Partnerships can file a K-1 schedule with the Internal Revenue Service to report a partner's income, credits, and deductions. New York State and New York City tax filings are required in addition to federal filings.
Tax rates for both personal income and corporate income vary among states. Most tax rates are flat regardless of income, but four states (Washington, South Dakota, Nevada, and Wyoming) currently do not have a corporate income tax. Individuals in Tennessee and New Hampshire are only taxed on dividend income and interest.
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