When you think about taxes, you probably directly associate the money that goes out to tax authorities with the money that’s come in. Take sales tax as an example. The more you sell, the more you’re going to pay. Income tax isn’t so different: the more you earn, the bigger your tax bill.
Don’t fall into the trap of thinking this is true of all taxes, though — especially if you operate in New York. The state franchise tax can get pretty tricky, and it might not be based on your sales at all.
So you don’t get an unwelcome surprise when it comes time to pay your New York State franchise tax, let’s dig into all the details you should know from Article 9-A.
Three different tax bases
New York doesn’t just apply one tax rate to all corporations across the state. (Of course not, that would be too simple). Instead, there are three different tax bases.
Does that mean you only need to calculate one? Unfortunately, no. You or your CPA need to crunch the numbers on all three to figure out which one is the highest. Because — lucky you — that’s the one you’re required to pay.
The three different tax bases are:
Business income base
This is the tax base that operates how you’d probably expect, meaning you pay a percentage of your income apportioned to New York State. C corps operating in the state of New York are subject to the following rates:
- Qualified manufacturer: .00
- Qualified emerging tech companies: .04875
- C corps with a business income base of $5 million or less: .065
- C corps with a business income base of more than $5 million: .0725
You’re probably tracking with us so far. When you prepare to pay a franchise tax, you’re usually ready for something like this. But if you crunch the numbers on the other two tax base options and either of them is higher, you’ll need to pay that amount, not the business income base.
Business capital base
This is where the surprise often comes in for companies operating in New York State. You calculate this number based on the total business capital you have apportioned to New York State (after you deduct short and long-term liabilities attributable to those assets).
Certain businesses get a .00 tax rate here, eliminating this potential tax base from the running. Those include:
- Manufacturers
- Qualified emerging tech companies
- Cooperative housing corporations
- Small business taxpayers
If you don’t fit into any of those categories, you’re subject to a business capital base tax rate of .001875. So even if you don’t have a lot of business income coming in from New York, if you’ve got a significant share of business assets in the state, you could be on the hook for paying this tax base.
Fixed dollar minimum (FDM)
Even if you’re coming up with a low number for the business income and business capital bases, you probably won’t be off the hook for the state’s franchise tax. That’s because New York has an FDM in place. If this is higher than your base for the other two categories, this is what you need to pay.
If you’re a general business, the FDM breaks down as follows based on your New York State receipts:
| $100,000 and below | $25 FDM tax |
| $100,001–$250,000 | $75 |
| $250,001–$500,000 | $175 |
| $500,001–$1,000,000 | $500 |
| $1,000,001–$5,000,000 | $1,500 |
| $5,000,001–$25,000,000 | $3,500 |
| $25,000,001–$50,000,000 | $5,000 |
| $50,000,001–$100,000,000 | $10,000 |
| $100,000,001–$250,000,000 | $20,000 |
| $250,000,001–$500,000,000 | $50,000 |
| $500,000,001–$1,000,000,000 | $100,000 |
| $1,000,000,000+ | $200,000 |
If you operate a qualified New York manufacturer or a qualified emerging tech company, the following applies based on your receipts in the state:
| $100,000 and below | $19 FDM tax |
| $100,001–$250,000 | $56 |
| $250,001–$500,000 | $131 |
| $500,001–$1,000,000 | $375 |
| $1,000,001–$5,000,000 | $1,125 |
| $5,000,001–$25,000,000 | $2,625 |
| $25,000,001–$50,000,000 | $3,750 |
Are you a qualified emerging technology company?
After going through those bases, you’re probably wondering if your C corp counts as a qualified emerging tech company, or QETC.
Per the New York Consolidated Laws — specifically, Public Authorities Law §3102-e — a QETC has to be:
- Located in New York
- Primarily offering products or services that are classified as emerging technologies
- Bringing in annual product sales of $10 million or less
Alternatively, you count if you have R&D activities in the state and your ratio of R&D funds to net sales equals or exceeds the National Science Foundation (NSF) average ratio for all surveyed companies classified. The state has some NSF ratios here.
To get a better feel for whether you qualify as a QETC — and if so, what it means for your taxes — you can dig into our blog on QETCs from a couple of years ago.
Avoiding New York State tax penalties
To recap, your New York State taxes are not necessarily just based on your revenue. If you have significant business capital and all or a majority of your business is done in the state, then you may be subject to the capital base tax.
And if you are subject to that tax and you don’t pay it in time, you could wind up with an additional tax burden in the form of penalties.
Don’t just assume you can wait until April to figure this out. If your past New York State taxes have exceeded $1,000 after credits, you’re required to make a mandatory first installment (MFI) of your estimated tax. And even if you were under that 1k mark in past years, if your taxes will exceed $1,000 this year, you’re still required to pay estimated tax installments. In some cases, your MFI might be due in March.
Don’t let your business face an unwelcome surprise when it comes to your New York State franchise tax. To talk with experts who can make sure you know what to expect — and who can help you make the appropriate payments on time to avoid penalties — get in touch.