One of the issues I often advise considering when deciding whether or not someone should charter a new corporation and in which state to do so is the minimum cost to keep the corp in good legal standing because it is often necessary to curtail corp activities without actually going through the steps of officially dissolving the entity, or it may take a few years before actually using the new corp.
For Federal purposes, there is no annual cost to keep a corp alive other than the need to file a corporate income tax return (Form 1120). If there is no taxable income, there is no tax due. However, as I’ve always said, an 1120 should always be filed to show IRS that there was no taxable income and to prevent them from using their wild imagination to assume that non-filing means there were millions of dollars in unreported taxable income.
Most states have a corporate income tax and an annual filing or franchise fee. Most of the states with an income tax base it purely on the net taxable income, just as IRS does. A few, most notably the PRC, have a minimum tax regardless of the net profit. For at least the past dozen years, this has been $800 per year for any corporation (C or S) operating in California. A corp showing no activity or a loss of thousands of dollars still has to pay the $800 minimum tax. The justification for this by the rulers in Sacramento is that “they can afford it.” This is a direct quote from one of the tax-writing legislators who spoke at a CPA meeting I attended several years ago. In addition to the $800 minimum income tax, the PRC has an annual filing fee, which is currently $25.
As I’ve mentioned several times in my discussions of corporations, a completely unexpected bonus of relocating to Arkansas was the fact that its corp income tax has no minimum and the annual franchise fee has been only $50 for as long as I’ve been here.
That is about to change, for the very same reason as given by the PRC Rulers. I just received several copies of the snail mail newsletter (dated as July 2004, it hasn’t been posted to the web yet) from the Arkansas Secretary of State, Charlie Daniels (not the country singer) with a mention that the 2005 annual franchise fee will be tripled, to $150 per year.
While this will still be cheap compared to the Left Coast, it does change the economics of holding onto inactive corporations. Several years ago, back when we expected to be doing farming full time, I had set up another Arkansas corporation that was intended to handle the ranch operations. Since I was drawn back into tax work full-time, that corp has been inactive and I have just been paying the $50 annual fee in order to keep it legal until I decide to use it more fully. Now that it will be costing $150 per year, I am seriously just considering dissolving it.
For 2005, the annual franchise fee will also be due a month earlier than the traditional deadline of June 1. Filing it by May 1 is no big deal, but it will catch many by surprise next year.
Tax Guru - Ker$tetter Letter 