Franchise Tax in Pennsylvania

April 13, 2006

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The state of Pennsylvania has both a franchise tax and a capital stock tax. If your corporation is a foreign corporation (a corporation organized outside of Pennsylvania), it is subject to the franchise tax unless you elect to be subject to the capital stock tax.

Franchise tax. Every qualified foreign corporation and company doing business in Pennsylvania is subject to a franchise tax. If you have a foreign corporation you may elect to compute and pay tax under the capital stock tax rules. If you make the election, you will be treated as if you are a domestic corporation (a corporation organized in Pennsylvania) in determining which of the assets are exempt from taxation and the value of their capital stock subject to tax. The franchise tax is based on the qualified capital stock value that is apportioned. (Capital stock is the total amount of stock authorized for issue by a corporation.)

The franchise tax is being phased out, with the rates set as follows: 4.89 mills for 2006; 3.89 mills for 2007; 2.89 mills for 2008; 1.89 mills for 2009; and .89 mills for 2010. The tax will be eliminated in 2011.

Capital stock tax. The Pennsylvania capital stock (property) tax is imposed on your company if it is a domestic corporation having capital stock, a joint-stock association, a limited partnership, and every company organized or incorporated by or under Pennsylvania law including regulated investment companies. For tax years beginning after 2006, the capital stock valuation formula is the product of one-half times the sum of the average net income capitalized at the rate of 9.5% plus 75% of net worth, from which product $125,000 (in 2006) is subtracted.

The capital stock tax is being phased out, with the rates set as follows: 4.89 mills for 2006; 3.89 mills for 2007; 2.89 mills for 2008; 1.89 mills for 2009; and .89 mills for 2010. The tax will be eliminated in 2011.

Pennsylvania limited liability companies (other than restricted professional corporations) that are taxed at the federal level as a partnership are subject to the capital stock tax.