Businesses See Significant Changes From The Texas Legislature

Businesses See Significant Changes From The Texas Legislature

Most Texans may not know that more than 1,600 bills were passed into law at the end of the most recent session of Texas Legislature. You also may not know that one of these bills, House Bill 500 (H.B. 500), will have a significant impact on businesses that are subject to the Texas Franchise tax. H.B. 500 is a voluminous hodgepodge of items relating to various areas of the franchise tax code. We can’t cover them all here, but a short list of items of note includes the following:

  • An expanded definition of retail and wholesale businesses; now included are:
    • Automotive repair shops of various types
    • Some rental-purchase agreement activities
    • Rental and leasing of party and event supplies
    • Rental and leasing of heavy construction equipment
  • Expansion of exemptions for certain organizations in the insurance and title industries, as well as political subdivision corporations
  • A break in calculating apportioned receipts for those providing internet hosting
  • A relocation incentive to bring new business to the state, applying to businesses who have not previously transacted business in Texas before
  • A credit for rehabilitating historic structures
  • For certain pipeline operators providing services to others, changes to expenses allowed for cost of goods sold calculation
  • Clarification of calculation of cost of goods sold for movie theaters
  • Change to the No-Tax-Due provision
  • Temporary tax rate cuts applying only to report years 2014 and 2015
  • Revenue exclusions for certain businesses
  • Some big changes in how to calculate an entity’s taxable margin

This article will focus on the some of the modifications that are certain to have your bank account sitting up and taking notice in the short term. The No Tax Due Provision Originally introduced in 2009, this was a temporary provision stating that a business having less than $1,000 tax due or total revenues equal to $1 million or less in a reporting period was not considered to owe any tax for that period. This provision has been made permanent, which is good news for small business owners. Temporary Tax Rate Cuts Small business owners could see a break on their 2014 and 2015 tax bills, due to a temporary rate cut enacted for businesses that qualify for the EZ Computation Method (usually those with total revenue of $10 million or less).

Most Businesses Retail/Wholesale Businesses
2013 Rate: 1% 2013 Rate: 0.5%
2014 Rate: 0.975% 2014 Rate: 0.4875%
2015 Rate: 0.95% 2015 Rate: 0.475%

While both the 2014 and 2015 temporary rate cuts were passed into law, the actual rate for the 2015 reduction is not definitively set as of this time. The franchise tax percentage for 2015 is contingent upon certain revenue estimates being met and certified on or after September 1, 2014. If the State Comptroller is not able to certify the revenue estimate, the 2014 rates will apply for 2015 as well. Revenue Exclusions Several amendments were passed detailing revenue exclusions, potentially lowering taxable margins for those in the listed industries. Exclusions from total revenue:

• Aggregate haulers – subcontracting payments to independent contractors for performing deliveries on behalf of the business • Transporters of barite – subcontracting payments to non-employee agents for transportation services performed on behalf of the business • Businesses primarily offering landman services – payments made to nonemployees • Registered motor carriers may exclude flow-through revenue from taxes and fees • For physicians, amounts paid for qualifying vaccines may be excluded • Waterway transportation businesses not subtracting cost of goods sold from taxable margin, can exclude direct costs of providing transportation (provisionally)

Calculating Taxable Margin One of the most significant items in H.B. 500 is the change in how an entity calculates it’s taxable margin, or the amount of revenue that is subject to the Franchise Tax. While small businesses with $1 million or less in total revenue have seen the benefit of the No Tax Due provision for the last several years, businesses that were right on the cusp of the $1 million threshold were denied any relief. The new rules for calculating taxable margin level out the playing field a bit. In addition to the previous choices for excluding either a percentage of revenue, cost of goods sold, or amounts paid for compensation, businesses can now elect to exclude $1 million of revenue from the taxable margin. Overall, many Texas business owners stand to see positive outcomes from the passage of H.B. 500, either from one of the provisions mentioned above or one of the many not listed in this brief article. Make sure that your business receives every possible benefit of these changes by speaking with a tax advisor. Our team at ADKF will be glad to investigate any possible new benefits for you or your business.

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