Texas Revised Franchise Tax

During the 3^rd Special Session in 2006, the Texas Legislature passed a bill to amend the Texas Franchise Tax.  The revision makes the franchise tax applicable to a wider base of businesses (i.e., closed many loopholes), lowered the tax rate, and changed the methods for calculating the tax base.

The revisions take effect for franchise tax returns due on or after January 1, 2008.  Generally speaking, these returns are based on a 2007 accounting period; this, in effect, makes January 1, 2007 the effective date of the franchise tax revision.

Please contact us for additional information or assistance in completing your Texas Franchise Tax Return.

Entities Subject to Tax

Generally speaking, franchise tax applies to active businesses who receive liability protection under state law.  This includes:

·         Corporations (Inc.),

·         Limited liability companies (LLCs),

·         General partnerships (GPs),   

·         Limited partnerships (LPs),

·         Limited liability partnerships (LLPs),

·         Professional associations (PAs),

·         Business associations, and

·         Other legal entities with statutory liability protection.

The following is a partial list of entities for which the Texas franchise tax does not apply:

·         Sole Proprietorships,

·         General partnerships directly owned by natural persons,

·         Passive Investment Partnerships,

·         Certain family limited partnerships,

·         Grantor trusts, estates of natural persons and escrows.

Tax Base

The revised tax base is the apportioned margin.  (“Apportioned” is the allocation of the entity’s total revenues and expenses to Texas.)  Margin is defined as the least of the following three calculations: 

·         Total revenue minus cost of goods sold,

·         Total revenue minus compensation or,

·         70% of total revenue.

Generally speaking, total revenue is based on federal income tax reporting.

Cost of goods sold excludes officer compensation.

Service entities are not eligible for the cost of goods sold deduction.

Compensation, limited to $300,000 per person, includes W-2 wages and owner and partner distributions to natural persons plus benefits (workers’ comp, health care, and retirement) provided to all personnel.

Tax Rate

The tax rate is 0.5 percent for retail and wholesale entities (SIC Major Groups 50-59), including eating and drinking establishments.  The tax rate for all other taxable entities is 1.0 percent.

No Tax Due

Taxable entities with apportioned revenues of $300,000 or less will owe no tax.  Taxable entities with tax due of less than $1000 will owe no tax.  However, all taxable entities must file a franchise tax return.

Combined Reporting

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report without regard to the $300,000 “no tax due” limitation.  All entities comprising the combined group must utilize the same method to compute margin. 

You can download a franchise tax calculator published by Texas State Comptroller.  The calculator is an interactive .pdf file.

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