NYS Franchise Tax S Corp: Everything You Need to Know
Understanding NYS franchise tax S-corp is important including understanding the tax state laws if you are a member of an S-corp.3 min read
Understanding NYS franchise tax S-corp is important if you are a member of an S-corp. To ensure your business is paying the proper amount due in taxes, it is important to understand the tax state laws in the state in which your business was formed. These taxes, typically referred to as corporate income taxes, will vary from state to state. In New York, the rules can be somewhat complex.
In New York, corporate income tax is referred to as a corporation franchise tax when referring to New York C-corporations and S-corporations. When referencing limited liability companies, general and limited liability partnerships, the tax is referred to as a filing fee.
When operating as a C-corporation in the state of New York, a corporation's franchise tax is the higher of the Maximum Taxable Income, MTI, the Fixed Dollar Minimum, FDM, the Business and Investment Capital, or the corporation's Entire Net Income, ENI.
What Is FDM Tax Based On?
For S-corporations, the FDM tax is based on the corporation's New York State receipts and is as follows:
- $25 – Receipts not exceeding $100,000
- $50 – Receipts exceeding $100,000 but not more than $250,000
- $175 – Receipts exceeding $250,000 but not more than $500,000
- $300 – Receipts exceeding $500,000 but not more than $1,000,000
- $1,000 – Receipts exceeding $1,000,000 but not more than $5,000,000
- $3,000 - Receipts exceeding $5,000,000 but not more than $25,000,000
- $4,500 - Receipts exceeding $25,000,000
How Does ENI Tax Rate Vary?
The corporation's ENI tax rate will depend on the amount of the corporation's federal taxable income. Generally, corporations operating in New York incur a tax rate of 6.5 percent if their federal taxable income is $290,000 or less. This is with the exception of a few New York manufactures that have qualified for a flat 6.5 percent rate regardless. For corporations exceeding the $290,000 limit, the tax rate is 7.1 cents on each dollar up to $390,000, then the rate is 4.35 percent for each dollar in excess of $390,000.
Why Do Corporations Want to Become an S-Corp?
Usually, when a traditional corporation forms and then later requests the state to recognize their corporation as an S-corporation, they are simply requesting S status with the IRS. This allows the corporation to be exempt from paying a separate federal income tax. S status enables the corporation's taxable income to pass through to its shareholders, and then shareholders are subject to taxation on their shares of the corporation's income.
How Do Nonresident Shareholders Pay Taxes?
If you are a nonresident shareholder or a part-year resident shareholder, you will only pay tax on the S corporation's items that are derived from New York sources. This determination will be made at the corporate level. There is a special form to be filed with the IRS to elect S status; however, New York does not recognize the federal S election unless a New York election form is filed as well.
What Happens When an Entity Doesn't Form as an S-Corp?
Failing to file the New York election form for S status with the state will mean the corporation will be taxed as though it is a traditional corporation. This means that tax credits are applied to the corporation's tax liability and the tax does not pass through to shareholders, thus residents must pay tax on the actual distributions of cash or property, rather than on their pro rata share of the pass-through items.
Non-resident shareholders do not pay on the actual distributions of cash or property, nor are they required to pay tax on their pro rata share of the S-corporations pass-through items.
If an S-corporation is not able to meet the filing deadline, they may request a six-month extension to file the franchise tax return. The extension request is made by filing, Request for Six-Month Extension to File New York S Corporation Franchise Tax Return, Form CT-5.4. You must pay the estimated franchise tax on or before the due date of the return.
When a partnership is conducting its business, employs some type of capital, owns or leases its property, or maintains an office within the state, this means it and any of its partners will be liable for NYS franchise S-corp tax.
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