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North Carolina has one of the most burdensome franchise tax systems in the United States. In fact, it is the highest state franchise tax in the entire country. In 2017, North Carolina ranked second behind New York for the highest franchise tax in America.
The franchise tax is paid regardless if the company does well or badly. And it is paid even if the company invests in new equipment. So, why do states impose such high franchise taxes?
In 2017, North Carolina reduced the franchise tax from 4.55 percent to 3.75%. But there are exemptions for certain types of businesses. For example, companies with $10 million in annual gross receipts will pay no franchise tax. Additionally, companies with $50 million in annual sales will receive a rebate if they invest in new capital expenditures.
North Carolina state income taxes
Most states charge a franchise tax, which is a type of corporate tax levied on corporations based on where they are incorporated. This tax is typically paid annually and is usually set at a flat percentage of taxable income. For example, North Carolina charges a franchise tax of 3% on most businesses. In addition, some states levy an additional tax on certain industries such as insurance companies, banks, real estate agents, and securities brokers. These taxes are often referred to as “occupational” taxes because they target specific occupations.
The franchise tax varies widely from state to state. Some states like California do not impose a franchise tax, while others like New York charge up to 8%. Other states have no franchise tax at all. States that don’t have a franchise tax generally use another form of taxation to generate revenue.
There is a minimum franchise tax for all businesses regardless of how much money they make. The minimum franchise tax is called the “base franchise tax.” This base amount is calculated by multiplying the number of employees working within the state by $200. The base franchise tax is $200 per employee multiplied by the total number of employees employed in the state.
For example, if you work for yourself and employ 10 people, you must pay a base franchise tax of $2,000 ($200 x 10). If you work for someone else and hire 20 people, you must pay the same base franchise tax of $4,000 ($200 x 20).
If you’re thinking about starting a business, it’s important to understand what kinds of taxes you’ll be responsible for paying. You might want to consider filing a Business License application online to save time and money.
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Tax Rates for Different Types of Businesses
Corporations are taxed like individuals, sole proprietorships are taxed just like businesses, limited liability companies are pass-through entities and don’t pay any taxes, and an S corporation is taxed differently.
There is a difference between a Federal Income Tax Return and a State Tax Return.
The IRS requires that you file a Form 1040 every year. However, some states require additional forms. These include:
• New York – NY Sales & Use Tax Returns – If you sell goods or services to customers within the state, you must collect sales tax and remit it to the state. Your annual Property & Casualty Insurance Report must also report taxable purchases.
• California – Personal Income Tax Returns – Individuals and estates must file a personal income tax return each year. In addition, there are several special reports including the Annual Statement of Assets & Liabilities, Annual Statement of Net Worth, and Annual Statement of Marital Status.
• Connecticut – Individual Income Tax Returns – Each individual filing a Connecticut income tax return must complete Schedule CT-EZ, which includes information about the taxpayer’s assets, liabilities, deductions, exemptions, credits, and net worth.
• Florida – Corporate Income Tax Returns – Every corporation doing business in Florida must file a Corporation Franchise Tax Return. This form contains detailed financial information such as total revenue earned, expenses incurred, and profit/loss.
Frequently Asked Questions
Who is subject to NC franchise tax
North Carolina Franchise Tax Law states that any person who engages in business activities in North Carolina is subject to state income taxes. A corporation may engage in business activities in North Carolina if it maintains its principal place of business in North Carolina. In addition, a corporation may engage in business activity in North Carolina if it does not have its central place of business outside North Carolina. At least 80% of its gross receipts are derived from business conducted in North Carolina.
The following corporations are exempt from paying franchise tax:
A corporation organized under Chapter 120 of the General Statutes;
Any corporation formed solely for religious, charitable, scientific, literary, educational, or hospital purposes;
Any corporation organized exclusively for fraternal benefit society purposes;
Any corporation whose stockholders are individuals;
Any corporation whose members are individuals;
Any nonprofit organization incorporated under Article 2 (§ 501(c)(3)) of the Internal Revenue Code;
Any corporation chartered by the United States government;
Any corporation created by a particular act of the General Assembly;
Any corporation organized under Chapter 180 of the General Statutes or any successor chapter;
Any corporation organized to acquire, hold, or dispose of real property;
Any corporation organized to provide services to persons residing in nursing homes, assisted-living facilities, or similar institutions;
Any corporation organized primarily to provide transportation services;
Does LLC pay franchise tax in NC
Yes, The first step to filing a business license application is to determine if you need to file a separate state income tax return. If you do not have any taxable income, you do not need to file a different NC Franchise Tax Return. However, if you have some taxable income, you should file a separate NC Franchise tax return.
How is franchise tax calculated in North Carolina
1. Franchise Tax Rate
The franchise tax rate is based on the revenue the business generates. To calculate how much money was generated, the state divides the total sales by the number of days in the year. Then they multiply that result by.05% (the franchise tax rate). So if you sold $100,000 worth of product over 365 days, you would pay $50.00 per day.
2. Sales Tax Rate
Sales taxes are collected at the time of sale. When calculating the sales tax, the state multiplies the dollar amount of the sale by the sales tax rate. If you sell $100,000 worth, you would have to collect $10,000 in sales tax.
3. Gross Receipts Tax
Gross receipts tax is a flat percentage applied to gross revenues before subtracting expenses. The gross receipts tax rate is set by law and cannot be changed. It is currently 4%.
4. Net Income Tax
Net income tax is a flat percentage of net profits after deducting expenses. The legislature sets the net income tax rate and cannot change it. Currently, it is 6%.
5. Corporate Income Tax
Corporate income tax is a flat tax levied on corporations. Corporations are taxed according to their net income. The corporate income tax rate is set annually by the General Assembly and cannot be changed.
6. Excise Taxes
Excise taxes are imposed on specific products. These taxes are not included in the calculation of the franchise tax rate. Exemptions may apply depending on the type of product being sold.
7. Use Tax
Use tax is a tax on goods purchased out-of-state and brought back into the state. The use tax rate is determined by the state where the purchase occurred.
James Rourke is a business and legal writer. He has written extensively on subjects such as contract law, company law, and intellectual property. His work has been featured in publications such as The Times, The Guardian, and Forbes. When he’s not writing, James enjoys spending time with his family and playing golf.