Texas has a reputation for being a "pro" business state. Our state "PR" machine tells everyone there isn't an income tax so "bring your business to Texas". Well, that is not all together true. For businesses there is an income tax.....actually it is a tax on the "gross margin" of the company. In 2006, Texas changed the profits-based Franchise Tax to a Gross Margin tax. The idea was to broaden the tax base and increase the taxes collected. What has actually happened is less tax is collected, but that is a topic for a different newsletter.
So, What is the Texas Franchise Tax?
The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. The intent of this is to tax all entity types that offer liability protection to their owners and applies to partnerships (general, limited and limited liability), corporations, LLCs, business trusts, professional associations, business associations, joint ventures, etc. Sole proprietors and general partners are exempt from the Texas Franchise tax.
Who is Required to File a Franchise Tax return?
All businesses that fall under the protected entity types above must file a franchise tax return. However, most businesses will not owe any tax since there is a no-tax-due threshold of $1,030,000 in Texas Revenue (revenue that is made in the State of Texas), OR if the total tax due is less than $1,000. If your business makes over the $1,030,000 Texas revenue threshold - you will likely owe franchise taxes.
Your revenue is determined when you subtract the highest of one of three items: Cost of goods sold, compensation, or 30% of total revenues.
Sounds Easy Enough, Right?
In theory, the franchise tax is very simple considering "total revenues", "cost of goods sold", & "compensation" are all common terms and located on the business's federal tax return, right? However, federal definitions and Texas definitions of these widely recognized terms are not the same. This has complicated the tax and forced business owners to keep 2 sets of books - one each for federal & state.
Different Rate for Different Businesses
Also, the tax rate is not the same for all industries. The current tax rate for retailers/wholesalers is .05%, half of what it is for all other companies at 1%. For tax years 2014-2015, the rate is dropped slightly but reverts back in 2016.
If you sell goods & provide services or have multiple companies - calculating total tax due becomes very difficult.
Fail to File, Lose your Protection
If you fail to file or extend your franchise return by the May 15th due date, you will be assessed a penalty of $50 regardless if any taxes are due. If you owe taxes and they are not paid in full by the due date an interest charge will be added to the amount due, even if you filed for an extension. Extended returns are due by August 15th for businesses owing more than $10,000 and November 15th for all others.
If you do not file a franchise tax report and do not pay the tax, penalty or interest due within 45 days of the due date, your right to transact business may be forfeited. If you fail to file or pay within 120 days of the forfeiture of the right to transact business you are subject to having your corporate registration is forfeited. If you lose your corporation, as an owner, you can also be held personally liable for the business's debt.
It Isn't Easy
The state of Texas margin tax rules are so complicated, we attend courses on the changes and legal interpretations each year. If your business earns less than $1 million the return is far less complicated. But if you own multiple entities or have revenue in excess of $1 million, I would not recommend attempting to file this tax return yourself. There are too many rules for each item on the return that can trip you up and you can make a mistake that will cost you thousands of dollars.