Florida Law
Florida Business Tax Law
- Business Tax Law
Business Tax Law
Every business is responsible for paying a variety of local, state, and federal taxes, depending in part on how the business is organized, the services the business provides, and the products it sells. In general, businesses are liable for federal and state income taxes, state sales tax, employment tax (Social Security), and unemployment compensation tax. Most taxes are assessed through the federal Internal Revenue Service and the Florida Department of Revenue (FDOR).
Some businesses may be subject to additional taxes. For example, a business that sells fuel or generates hazardous waste is liable for additional state taxes. Firms that do business both inside and outside of Florida are assessed state income tax based on an apportionment of the business' adjusted federal income. The weighted formula takes into account the percentage of property, payroll, and sales attributable to the business in Florida. Businesses with employees are responsible for withholding taxes from the employees' pay. This chapter discusses some of these liabilities and responsibilities.
Taxes and the Form of Organization
Florida businesses are responsible for different types
of taxes depending on the way they are organized. The
four common forms of business organizationsole proprietorship,
partnership, limited liability company, and corporationare
discussed here.
Sole Proprietorship
Under a sole proprietorship, the individual tax rate,
rather than the higher corporate rate, applies to income
because the owner is the taxpayer. In Florida, however,
individuals are not subject to income tax, so there
is no state business income tax on a sole proprietorship.
The owner reports income and expenses from the business
on his or her individual federal income tax return,
using federal Form 1040 and Schedule C. Most sole proprietors
are liable for self-employment tax, discussed below,
which is filed using federal Form SE. Usually, sole
proprietors make estimated tax payments in quarterly
installments during the year, using federal Form 1040-ES.
Partnership
A partnership itself does not pay taxes; each partner
reports his or her income and deductions individually
on federal Form 1040 and Schedule E. Thus, the individual
tax rate rather than the higher corporate rate applies
to each partner. Generally, benefits such as health,
dental, and life insurance are not deductible by individual
partners. Partners usually are liable for self-employment
tax, and generally they make quarterly estimated tax
payments toward their year-end tax liability, using
federal Form 1040-ES. As is the case in a sole proprietorship,
individual partners do not pay Florida income tax.
Even though it does not pay federal taxes directly, a partnership is required to file with the IRS an "information return," federal Form 1065, which reports partnership income and distributions to the partners. A Florida partnership must file an "information return," Form F-1065, with the FDOR if it includes a corporate partner.
Limited Liability Company
A limited liability company organized under Florida
law, or a similar artificial entity organized under
the law of another jurisdiction, determines its taxable
income the same way a corporation calculates its taxable
income by the filing of a federal tax return, discussed
below. If no federal return is filed, the limited liability
company determines taxable income as if a federal return
had been filed.
Corporation
A corporation is an association of shareholders created
under law and regarded by the courts as an artificial
person with its own legal identity. There are two kinds
of corporationsC corporations and S corporationsand
each is subject to different tax laws.
C Corporation
At the federal level, a C corporation is taxed under
the provisions of Subchapter C of the Internal Revenue
Code, and it is subject to a tax rate that is higher
than the individual rate. Generally, the corporate
tax rate ranges from approximately 15 percent for a
corporation with an income of $50,000 or less, to 35
percent for a corporation with an income over $10 million.
Corporations use federal Form 1120 or Form 1120-A to
report income, deductions, and credits, and to compute
tax. Other federal forms also may be required.
The taxable income of a C corporation is determined prior to distribution of shareholder dividends. Each shareholder reports dividend income from a C corporation on his or her individual Form 1040. Thus, profits distributed as dividends are taxed twiceonce on the C corporation's tax return and again on an individual shareholder's tax return. Shareholders may not use a corporation's losses for their individual tax purposes. However, dividends may be accumulated by the corporationup to certain limitsto postpone the double taxation. For state taxes, a C corporation uses Florida Form F-1120, Florida Corporate Income/Franchise and Emergency Excise Tax Return, and is liable for tax on net income (based on federal taxable income modified by certain subtractions and additions) of 5.5 percent.
Some C corporations are subject to an alternative minimum tax (AMT) in addition to the regular corporate tax. The AMT is a way to compute a corporation's economic income more precisely by eliminating some of the credits, deductions, and exclusions that allow a corporation with substantial income to reduce its tax liability to a nominal level. If the corporate taxpayer is subject to the federal AMT, Florida requires calculation of a Florida AMT, computed at 3.3 percent. The corporation is liable for the greater of the AMT or the regular tax.
Florida corporations are required to make estimated tax payments, using Form F-1120ES, if the corporate taxpayer reasonably expects the total tax liability to exceed $2,500. Federal estimated tax payments are made quarterly to an authorized financial institution or Federal Reserve Bank, using Form 1120-W. Interest and penalties may be assessed for failure to pay estimated taxes promptly.
S Corporation
Subchapter S of the Internal Revenue Code applies to
an S corporationalso known as a tax-option corporationwhich
generally is not directly liable for federal income
tax. Instead, each shareholder pays tax on his or her
share of the S corporation's income and deductions
by including it on federal Form 1040. S corporation
status may be elected only by qualifying corporations
that file Form 2553, Election by a Small Business Corporation.
The S corporation also is required to file federal
Form 1120-S with supporting schedules, and it must
file Florida Form F-1120 in its initial year in Florida.
S corporations are required to pay estimated federal tax on any income that is not passed to shareholders and estimated state tax if the corporation's annual tax liability will exceed $2,500.
Tax Credits
Tax Credits
Various federal tax credits are available to certain
businesses. Examples of these tax credits include:
*Businesses with 30 or fewer full-time employees or $1 million or less in gross receipts may credit expenses related to complying with the Americans with Disabilities Act.
*Employers of persons from targeted groups with particularly high unemployment rates or special employment needs may credit wages paid to members of the targeted groups.
*Some businesses that increase their research activities over a base amount may credit about 20 percent of the amount of increase.
The state of Florida also provides tax credits to businesses to encourage them to engage in socially beneficial endeavors. For example, in 1995, the state created new enterprise zones. Enterprise zones are areas designated to encourage economic revitalization by offering financial incentives to businesses. Enterprise-zone businesses may qualify for certain sales tax and corporate income tax credits. The Florida statute also includes job creation incentive credits, which credit a business that establishes jobs for new business employees in enterprise zones. Such businesses may be eligible for credit on wages paid. The FDOR is the contact office for more information on these credits. Prior to filing an application for an enterprise-zone tax credit with the FDOR, the business must have the application certified by the local enterprise zone development agency in the county in which the business is located.
Taxpayer Identification Numbers
Several types of taxpayer identification numbers apply
to Florida businesses: the Federal Employer Identification
Number (EIN), the Florida corporation number, and the
Florida Division of Unemployment Compensation account
number. A sole proprietor generally uses his or her
personal Social Security Number as the EIN. However,
certain sole proprietors and all partnerships and corporations
must apply for an EIN from the Internal Revenue Service
(IRS) using Form SS-4. Additionally, sole proprietors
must obtain an EIN if they have employees or a retirement
plan, or if they are liable for federal excise taxes,
such as for alcohol, tobacco, or firearms. The FDOR
will assign appropriate corporation or account numbers
when the business registers with the FDOR. An unemployment
compensation account number is issued upon request
by the Florida Department of Labor and Employment Security,
Division of Unemployment Compensation.
Selecting the Tax Year
A tax return is based on an accounting period called
a tax year. A tax year may be either a calendar year
or a fiscal year. A calendar year is 12 consecutive
months from January 1 through December 31. A fiscal
year is composed of any other 12 consecutive months.
Once a tax year is established, a business needs IRS
approval to change it. Businesses use the same tax
year for federal and state tax returns. Sole proprietorships
usually use a calendar tax year. A partnership generally
must use the same tax year as the partners who own
a majority interest. If the majority partners' years
differ, the business must use the same tax year as
the principal partnersthose with a 5 percent or greater
interest in partnership profits or capital. If the
principal partners' years conflict, a partnership generally
uses a calendar tax year. A fiscal tax year can be
used if the IRS agrees that there is a business purpose
for using a fiscal year, or if the partnership files
IRS Form 8716, Election to Have a Tax Year Other than
a Required Tax Year, also known as a "Section-444
election." In the latter case, a business may
have to pay a fee that represents the amount of tax
deferral benefit that results from using a fiscal,
rather than calendar, year. A C corporation's first
income tax return establishes its tax year. The first
tax year must not be greater than 12 months from the
date of incorporation. A C corporation that provides
personal services must use a calendar tax year unless
it has IRS approval to use a fiscal year or it makes
a Section-444 election. An S corporation must use a
calendar tax year unless it gets IRS approval. In some
cases, S corporations may make a Section-444 election.
Employment Taxes
A number of taxes are of interest to businesses with
employees.
Payroll Taxes
The taxes discussed here are often called payroll taxes
because employers are responsible for deducting an
employee's share of tax from his or her earnings before
the employee is paid.
FICA Taxes
Taxes under the Federal Insurance Contributions Act
(FICA) help pay for Social Security and Medicare benefits.
Businesses without employees do not pay FICA tax. Most
sole proprietors and partners in partnerships without
employees pay a self-employment tax, which is discussed
later in this chapter. Businesses with employees contribute
half of the total FICA tax, and are responsible for
collecting the other half from employees through payroll
deductions. For 1995, the tax rate for the Social Security
portion of FICA tax was 6.2 percent each for employers
and employees (a total of 12.4 percent). The maximum
wage subject to the tax changes annually. The 1995
tax rate for the Medicare portion of FICA tax was 1.45
percent each for employers and employees (2.9 percent
total). Special rules apply to employees who receive
tips, to persons who receive both wages and self-employment
income, and to employees receiving non-wage payments
for items such as meals, lodging, clothing, and some
services. The employer's share of FICA taxes is deductible
as a business expense.
Income Tax Withholding
Along with the employee's share of FICA tax, employers
must withhold federal income tax from the employee's
pay. The amount to withhold is determined by the employee's
pay and by the number of withholding allowances that
the employee claims on federal Form W-4, Withholding
Allowance Certificate. Employees are required to complete
Form W-4 when hired, and generally the employer retains
the form. However, the form must be filed with the
IRS if the employee claims more than 10 withholding
allowances, or if the employee claims exemption from
withholding and his or her wages normally exceed $200
per week. A monetary penalty may be assessed against
the employer for any form that is not filed when required.
Employers must furnish a statement of wages and taxes, federal Form W-2, to employees by January 31 of each year or, if requested by the employee, within 30 days of termination. The federal copy of Form W-2 must be submitted to the IRS, accompanied by federal Form M-3, Transmittal of Income and Tax Statements.
Payroll Tax Return
Generally, employers report FICA taxes and withheld
federal income tax together on federal Form 941, Employer's
Quarterly Federal Tax Return, which is filed at the
end of each calendar quarter. There are different forms
to be used for agricultural and household workers and
for employees who are not subject to FICA taxes. Most
employers are required to make deposits for payroll
taxes before returns are actually due. How often deposits
must be made is determined in part by how much tax
liability a business has accrued in the past. For example,
a business that owed $50,000 or less in payroll taxes
during a specific previous 12-month period may be designated
a monthly depositor; a business that owed $50,000 to
$100,000 during the specific period may be required
to deposit more frequently. The depositor designation
is reevaluated annually. A business' actual tax liability
at the end of each deposit period determines whether
it actually must make a deposit. If the amount of accumulated
undeposited liability reaches $100,000 in any period,
taxes must be deposited the day after that volume is
reached, and if the business' deposit status was monthly,
it is immediately changed to require more frequent
deposits.
Self-Employment Tax
Self-employment tax is a Social Security and Medicare
tax for individuals who work for themselves. This includes
sole proprietors and most partners in partnerships
without employees. Net earnings of $400 or more are
subject to self-employment tax. For 1995, there was
a ceiling of $61,200 on the amount of earnings subject
to the Social Security portion of the tax, but there
was no ceiling for the Medicare portion. The Social
Security portion was assessed at 12.4 percent of earnings,
and Medicare was assessed at 2.9 percent, for a total
self-employment tax of 15.3 percent. Federal Schedule
SE is used to calculate self-employment tax, which
is then added to the total tax liability on Form 1040.
One-half of the self-employment tax is deductible as
an adjustment to gross income on Form 1040.
Unemployment Tax
Federal and state governments have programs to help
support able workers who lose their jobs. Tax under
the Federal Unemployment Tax Act (FUTA) is reported
by eligible employers once per year on federal Form
940 or 940-EZ. The form usually is due one month after
the end of the calendar year. However, deposits toward
the annual payment are required at the end of any quarter
in which the employer accrues $100 or more in FUTA
tax liability. Penalties may be imposed for late filing
and late deposits. Most employers, even those with
part-time employees, are responsible for paying FUTA
tax. The general rule is that a business is subject
to FUTA tax if the business pays wages of $1,500 or
more in any calendar quarter, or the business had a
least one part-time employee in each of 20 different
(not necessarily consecutive) calendar weeks. In addition,
FUTA tax is due on cash wages of $1,000 or more paid
in any calendar quarter to domestic workers who work
in a private home, local college club, or local fraternity
or sorority house.
A business that employs farm workers is subject to FUTA tax on the workers' wages if the wages total $20,000 or more in any calendar quarter, or if there was at least one day in each of 20 different calendar weeks when the business had ten or more at least part-time farm workers. The tax is figured at a rate of 6.2 percent of the wages paid to the employee up to $7,000. Tip income reported by an employee to an employer for FICA tax purposes is considered wages for calculating FUTA tax. However, the tax does not apply to some payments, such as workers' compensation payments, nor does it apply to certain types of employment, such as earnings paid to cooperative education students. A business is credited for up to 5.4 percent of the amount it pays for state unemployment tax, which can reduce the actually tax liability to 0.8 percent. The IRS administers the FUTA tax.
The state has its own unemployment program and corresponding taxes. An employer that conducts business in Florida must seek from the Florida Department of Labor and Employment Security a determination of whether it is liable for the tax. Liability for the unemployment tax is based on the number and type of employees, the amount of wages paid, and other factors. The tax rate for new employers is based on general experience. Once a business has paid unemployment tax for a period of time, the tax rate will be based on the business' experience, using a benefit conversion factor. The minimum experience rate is 0.6 percent. The maximum experience rate is 8.2 percent. An employer's experience rate is redetermined annually, just after June 30. An employer new to Florida who has been subject to the unemployment compensation law of another state may transfer the employment records and experience rating to Florida in order to receive the lower contribution rate. Further information about unemployment compensation is available from the Division of Unemployment Compensation at the Florida Department of Labor and Employment Security.
Sales and Use Taxes
Florida sales and use taxes, which are assessed at 6
percent, must be paid on most sales and rentals, some
services, and use of taxable items delivered or brought
into Florida. Items or services generally exempt from
sales tax include:
*Food and drink
*Medicines and medical devices
*Professional or personal services
*Residential utility and telephone use
*Sales of farm products by the producer
*Sales of tangible personal property to or by a church
*Some seeds or other items used by farmers, nurseries,
or gardeners
Prior to engaging in business, the person or company subject to sales and use tax must register with the FDOR by filing Form DR-1, Application for Sales and Use Tax Registration. Any exempt sales must be verified by the dealer. The dealer must collect the sales tax owing on the purchase at the time of the sale, if it is not exempt. Sales tax returns must be filed on the first day of the month following the date of sale, even if no tax is owing. Late penalties and interest may be assessed on late returns. Dealers are required by Florida law to keep records of all transactions for at least five years, and the records are subject to inspection by the FDOR.
Local Sales Tax
In addition to the sales tax imposed by the state, a
number of counties have been granted authority to impose
a sales tax. This surtax is imposed on all transactions
occurring in the county imposing the surtax, unless
the transaction is specifically exempt. Generally,
the surtax is assessed in the county in which the merchandise
is sold and delivered or in which a service is provided.
The rate of the surtax generally ranges from 1/2 percent
to 1 percent. Tangible personal property sold for over
$5,000 is not subject to the surtax. Although the surtax
is imposed by the counties, the FDOR administers and
collects the surtax, and it is the agency that enforces
payment of the surtax.
Florida counties also are authorized to impose additional taxes on the lease or rental of living accommodations, or "transient rentals." In counties in which such taxes are assessed, landlords who enter into leases with more than six-month terms are not required to register for or collect sales tax. Dade, Duval, and Volusia Counties locally administer, assess, collect, and enforce such a tax, known as a "convention development tax." The convention development tax ranges from 2 to 3 percent. These counties, as well as many others, also impose a "local option tourist development tax" that is locally administered, collected, and enforced, and ranges from 2 to 4 percent. Monroe County also imposes a "tourist impact tax" that is assessed at 1 percent and paid to the FDOR.
Other Taxes
Business owners also need to be aware of a variety of
miscellaneous taxes. For example, the federal government
assesses various excise taxes. Excise taxes are imposed
on the sale, use, or lease of the following articles
by the manufacturer, producer, or importer:
*Alcohol sold as fuel but not used as fuel
*Bows and arrows
*Certain vaccines
*Coal
*Electric outboard motors and certain sonar devices
*Gas-guzzling automobiles
*Highway-type tires
*Sport fishing equipment
There are environmental excise taxes, such as taxes
on the sale or manufacturing use of certain ozone-depleting
chemicals, and there are luxury taxes, such as a tax
on the sale of passenger vehicles that cost over $30,000.
Many of these taxes are reported with federal Form 720, Quarterly Federal Excise Tax Return. Although the return is filed quarterly, the taxes generally must be deposited before the return is due. There are additional excise taxes that are reported separately from those described above. For example, certain heavy vehicles, including buses, truck tractors, and trucks with gross vehicle weights of 55,000 pounds or more, are subject to a federal highway use tax. Pickup and panel trucks are not subject to the tax. Generally, the vehicles must be used on public roads more than 5,000 miles per year. This tax is reported on IRS Form 2290, Heavy Vehicle Use Tax Return. There are also taxes on alcohol, tobacco, and firearms that are filed with the Bureau of Alcohol, Tobacco, and Firearms.
Florida law requires separate taxes or fees in addition to those discussed above. Corporations and corporate partners with assets placed in service between January 1, 1981 and December 31, 1986 are subject to a Florida "emergency excise tax," which is based on the depreciation deducted on the federal tax return. People who sell or lease motor vehicles collect a $2 fee for deposit in the Motor Vehicle Warranty Trust Fund. Solid waste fees are paid on the retail sale of motor vehicle batteries and tires. A surcharge of 50 cents is imposed on every bag of oysters taken from Apalachicola Bay, for payment into the Apalachicola Bay Conservation Trust Fund. Additional Florida taxes are assessed in the areas of fuel, pollutants, perchloroethylene, documentary stamps, utility services, production of oil and gas, and severance of solid minerals.
Resources
Florida Department of Labor and Employment Security,
Division of Unemployment Compensation, 201 Caldwell
Building, 107 Madison Street East, Tallahassee, FL
32399-0206, (904) 921-3889.
Florida Department of State, Division of Corporations, P.O. Box 6327, Tallahassee, FL 32314, (904) 487-6052.
Florida Revenue Department, Taxpayer Assistance, 5050 Tennessee Street West, Suite 104, Tallahassee, FL 32399-0100, (904) 488-6800 or (800) 352-3671; TDD (904) 922-1115 or (800) 367-8331. Call for free booklet: Florida Tax Guide.
Internal Revenue Service, 1111 Constitution Avenue NW, Washington, D.C. 20224, (800) 829-3676.