What People Need to Know About Texas Franchise Tax

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The Texas Comptroller levies the Texas franchise tax annually on all taxable entities operating a business in the state. They can calculate the tax in different ways since it is based upon the entity’s margin. By May 15, every year, businesses in Texas need to file an Annual Franchise Tax Report.

People Required to Pay Texas Franchise Tax

Those who must pay the franchise tax include:

  • Joint ventures
  • Business Associations
  • Professional Associations
  • Trusts
  • All Partnerships
  • Professional Corporations
  • S-Corporations
  • Savings and Loans Associations
  • State Limited Banking Associations
  • Banks
  • LLCs and Series LLCs
  • Corporations
  • Other legal entities

Excluded Entities

Some of the entities excluded from the Texas franchise tax are:

  • Unincorporated political committees
  • IRS Code Section 501(c)(9) Trusts exempt
  • IRS Code Section 401(a) qualified trusts
  • Self-insurance trust (non-profit) (insurance Code Chapter 2212)
  • Certain qualified real estate investment conduits
  • Real estate mortgage investment conduits
  • Estates of natural persons & escrows, specific grantor trusts
  • Certain unincorporated passive entities
  • Tax code Chapter 171, Subchapter B with exempted entities
  • A single natural person owing by general partnerships
  • Sole proprietorships (except single-member LLCs)

How to Calculate the Texas Franchise Tax

The state calculates the Texas franchise tax on a business’s margin for all entities with revenue of more than $1,110,000. People can calculate the margin using the following:

  • Total revenue minus $1 million
  • Total revenue minus compensation
  • Total revenue minus cost of goods sold
  • Total revenue multiplied by 70 percent

Calculating Total Revenue

They calculate the total revenue by subtracting statutory exclusions after taking amounts reported for federal income tax. Statutory exclusions are:

  • Certain flow-through funds
  • (IRS code Sections 78 & 951-964) for dividends and foreign royalties
  • Schedule C dividends
  • Dividends & interests from federal obligations
  • Other industry-specific exclusions

How They Calculate the Cost of Goods Sold

Goods sold costs are costs related to real property and tangible personal property production and acquisition. Specific industries get other allowances. Some companies may not have a cost of goods sold deduction if their businesses sell services.

How They Calculate a Compensation Deduction

Compensation deductions are:

  • Benefits provided to all personnel to extent deduction for income tax purposes
  • W-2 wages & cash compensation to employees/partners/owners/directors

Payroll taxes employer pays or 1099 labor are not included in compensation.

Tax Credits Available

  • Certified historic structure rehabilitation credit under TEXAS Tax Code Chapter 171, Subchapter S
  • Business loss carryforwards temporary credit under TEXAS Tax Code Section 171.111
  • Development and research activities credit under TEXAS Tax Code Chapter 171, Subchapter M

How to File

People can file for Texas franchise tax through three ways, and they are:

  • Long Form
  • EZ Computation
  • No Tax Due

A business may not owe any franchise tax if their business is under the $1,110,000 revenue limit. However, businesses can take the time to fill out the Long Form or choose to fill out and file the EZ Computation form if they are above the limit. They can also use the Texas Franchise Tax Online Calculator to do a rough calculation of what they will owe. They can also get the Franchise Tax Report forms from the Comptroller and then submit them through a specific address.