How to Calculate Franchise Tax

by George Lawrence J.D.; Updated September 26, 2017
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Certain states, such as Texas and Delaware, impose franchise taxes on businesses that operate within the state. According to legal-explanations.com, by paying the franchise tax, the business essentially earns permission to continue business operations within that state. States choose how to impose franchise taxes. Delaware imposes a franchise tax based on the number of shares a corporation has. Texas, on the other hand, determines its franchise taxes based on profit margins and the percentage of business done within the state. Check with your state’s revenue department for more specific information.

Step 1

Contact your state’s department of revenue and determine whether the state has franchise taxes based on shares or based on profits. Skip Step 2 if your state does not use the authorized shares method of franchise taxation.

Step 2

Count the number of authorized shares your business has; this is the number of shares your business is permitted to sell. Use a taxation table to figure your franchise tax based on the number of shares. For example, if your business has 10,000 authorized shares and your state taxes $50 for every 5,000 shares, you owe $100 in franchise taxes.

Step 3

Determine your business’s profit margin. Typically, this involves adding revenue and subtracting costs such as wages and benefits.

Step 4

Calculate the percentage of business done in the state imposing a franchise tax. If you operated your business only within that state, your tax margin is 100 percent.

Step 5

Multiple the percentage of business done in your state by the profit margin of your business. This equals your taxable margin. For example, if your profit margin was $10,000 and you did 75 percent of your business in State A, your taxable margin in the state is $7,500.

Step 6

Multiple your taxable margin by your state’s franchise tax amount, which varies from state to state. Texas, for example taxes retailers a .5 percent franchise tax. If your taxable margin was $7,500 and you are a retailer, your franchise tax is approximately $40.

About the Author

Based in Traverse City, Mich., George Lawrence has been writing professionally since 2009. His work primarily appears on various websites. An avid outdoorsman, Lawrence holds Bachelor of Arts degrees in both criminal justice and English from Michigan State University, as well as a Juris Doctor from the Thomas M. Cooley Law School, where he graduated with honors.

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