Franchise Taxes on Business Income in Florida

April 13, 2006

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Florida imposes an annual report and filing fee requirement on foreign and domestic corporations. The filing fee is $61.25, with a supplemental fee of $88.75, for a total fee of $150. The reports must be sent to the Secretary of State between January 1 and May 1 each year. The total fees for annual reports received after May 1 increase to $550.

Florida also imposes income-based taxes on certain types of businesses. In Florida, you're generally free to choose to operate your business as a corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may determine whether you or your business pay income taxes on the business income.

Sole proprietorships. Florida does not impose an income tax on individuals. This basically means that if you operate your business as a sole proprietorship in Florida, your income will not be subject to Florida income tax.

Corporations. Florida imposes a franchise tax on foreign and domestic corporations for the privilege of doing business in Florida. The tax is imposed at the rate of 5.5 percent of net income for the year. The first $5,000 of net income for the year is exempt.

Save Money

There is a special subtraction you can take from net income if you incur childcare facility startup costs. In order to qualify, the childcare facility must be located in Florida, on the premises or within five miles of the employees' workplace, and must be used exclusively by the your employees. Startup costs include expenditures for equipment, including playground equipment and kitchen appliances, and for real property, including land and improvements, used to establish the facility. The child care tax credit will expire June 30, 2008.

S corporations. To avoid the double taxation trap of a regular corporation, the IRS allows businesses to elect to be treated as an S corporation. If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any IRS corporate level income tax. However, you'll have to claim your entire share of the business' income on your personal federal income tax return even if you did not take any money out of the business.

In Florida, an S corporation can be a real benefit tax-wise. S corporations are not subject to Florida income tax, except on income that's taxable for federal income tax purposes. There is no pass-through of income of the S corporation to individual shareholders for Florida income tax purposes, since Florida does not impose an income tax on individuals.

Partnerships. If you operate your business as a partnership, there is no partnership-level tax. The Florida income tax is imposed on artificial entities, other than businesses operated as sole proprietorships or partnerships. No income tax is imposed on natural persons in Florida.

Limited liability companies. Florida law recognizes businesses operating as limited liability companies (LLCs). As an LLC, you will be treated, for Florida tax purposes, exactly like a corporation. This is the case regardless of your tax treatment for federal tax purposes.

Warning

The tax benefit of operating your business as an LLC in Florida may be negligible. You may be better off operating as a pass-through entity — perhaps a partnership or S corporation. There is no pass-through of income to individual shareholders of an S corporation or to partners in a partnership for Florida tax purposes because Florida doesn't impose an income tax on individuals.