Maryland Franchise Business Taxes: Everything You Need to Know

 

 

Tax Incentives

Businesses use tax incentives to grow and expand. They help companies become successful while providing jobs. Many states offer tax incentives to entice companies to relocate. Others provide financial support to keep existing companies in state. Businesses often choose where to locate based on factors like cost of living, quality of life, and job availability.

Corporate Taxes

Maryland corporate tax law requires corporations to pay taxes based on their net income, which is calculated by subtracting expenses from revenue. This calculation takes into account both domestic and foreign sources of revenue.

A corporation’s net income includes dividends paid to shareholders. These dividends are subject to taxation at different rates depending on whether the company is domiciliary in Maryland or another state. For example, dividends paid to residents of Maryland are taxed at 5% while those paid to residents of Delaware are taxed at 8%.

Non Corporate Business Income Tax

The Internal Revenue Service (IRS) provides information about how to prepare and file your federal income taxes. If you are self-employed, you must file Form 1040NR/1040NR-EZ. You can use our free online e-filing tool to complete your return. There are three different ways to file your returns: paper filing; electronic filing; and filing via the Automated Filing System (AFS).

If another person employs you, you must file Form W-2. You can use our Free Online E-Filing Tool to complete your return. For more information on filing your payroll taxes, see Employer’s Quarterly Federal Tax Return (Form 941), Employer’s Annual Federal Unemployment (FUTA) Tax Return (Form 940), and Employer’s Share of Social Security Taxes (Form 942).

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If you operate a sole proprietorship, partnership, LLC, corporation, or S corporation, you must file Form 1120, Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., or Form 1120S, Schedule SE, Self-Employment Tax.

You can use our Free Online e-Filing Tools to complete your return. We recommend that you print out your completed return and mail it to us. You do not need to send us a copy of your return. However, we suggest that you keep a copy of your return for your records.

For more information about preparing and filing your federal income tax return, please contact the IRS at 800-829-3676.

Personal Income Tax

The tax code includes several different types of personal income taxes. These include Federal Adjusted Gross Income Taxes, State Personal Income Taxes, local property taxes, and local sales taxes. Here is how each one works.

Federal Adjusted Gross Income Taxes – This is the main type of income tax you pay. You calculate your Federal AGI by taking your total taxable income and subtracting certain allowable deductions. For example, if you make $50,000 per year and your state allows you to deduct 50% of your medical expenses, you would add up all of your medical expenses and divide it by 2. Then you would multiply that number times 50% to arrive at your deduction amount.

State Personal Income Taxes – If you live in a state where you do not file a federal return, you must file a separate state return. Each state calculates its own rates for personal income taxes. Some states charge flat rates while others use graduated rates. Most states impose a maximum tax rate. The maximum tax rate varies depending on the age of the taxpayer. States also allow taxpayers to deduct some of their standard deductions.

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Local Property Taxes – All counties require residents to pay property taxes. The amount of the property tax depends on the value of the home. There are limits on what you can deduct.

Local Sales Taxes – Every city imposes a sales tax. Typically, cities charge a lower rate than states. However, many states exempt food purchases from sales taxes.

 

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Property Taxes

The tax bill is due April 15th. If you haven’t already done it, now is the time to file your 2017 state and local property tax returns. This year, there are some changes to how property taxes are calculated. Here’s what you need to know about filing your return.

Business Personal Property

In Maryland, there is no state income tax on businesses. However, most counties and cities do impose taxes on business personal property. These taxes are usually based on the depreciated value of the items being taxed. Some items are exempt from taxation including certain types of inventory, machinery, vehicles, office equipment, computers, books, records, etc.

 

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Sales and Use Taxes

The following are some examples of how sales and use taxes apply to different types of transactions.

EXAMPLE #1: A person buys a car for $10,000. He pays sales tax on the entire purchase price. If he drives the car for one year, he uses it 2,500 miles per year, and pays annual registration fees, his taxable income is $2,500 ($10,000 – $7,500). His tax liability is calculated as follows:

$2,500 x 0.08 $200

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If the same person rents a car for six months, he uses it 3,000 miles per month, and pays monthly rental fees, his taxable income would be $3,000 ($6,000 – $3,000). His tax liability is computed as follows:

$3,000 x 0.08 240

In both cases, the taxpayer owes no additional tax because the total amount of gross receipts does not exceed $4,000.

EXAMPLE#2: A person buys a computer system for $20,000. He sells the computer system for $30,000. He receives $10,000 in cash and a note receivable for the remaining $20,000. If he sells the computer system within three years, he uses it 4,000 hours per year, and pays yearly maintenance fees, his taxable income will be $8,000 ($30,000 – $22,000). His tax bill is computed as follows: $8,000 x.08 $160.

 

 

Frequently Asked Questions

What kind of tax will you owe on Maryland business income?

A small business owner with an adjusted gross income (AGI) of less than $100,000 may claim a credit against her or his individual income tax liability equal to 30% of the AGI. For example, if a person earns $50,000 in business income, she or he could receive a refund of up to $15,000.

What triggers franchise tax?

Maryland requires all corporations doing business in the State to have a registered agent and maintain a principal place of business in Maryland. Corporations must also pay franchise tax annually on their net worth. Net worth includes any assets owned by the corporation plus its liabilities.

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