Texas Franchise Tax

Texas Franchise Tax

There are many things that come to mind when people think of Texas—oil wells, BBQ, cattle, cowboys, football, the Longhorns. Even though it has the same five letters, one thing not associated with Texas is “Taxes.” This is because there isn’t an individual income tax imposed on its residents. Businesses, on the other hand, are required to file an annual tax return.

This tax return is called a Texas Franchise Tax Report. The Texas Franchise Tax Report is due on May 15th each year. If May 15th falls on a Saturday, Sunday, or legal holiday, the next business day becomes the due date.

You may wonder how to file these forms. It is best to file the forms online through the Texas State Comptroller website. The first time you use the Texas eSystems, you will need to set up a profile. You may also mail the Texas Franchise Tax return to the Texas Comptroller or personally file it at one of the offices throughout the state.

“How do I know if I need to file a Texas Franchise Tax Report?” According to the Texas State Comptroller website, “The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.”

  • If the business has been formed or incorporated in Texas, it is required to file a Texas Franchise Tax return.
  • If a business not formed or incorporated in Texas has a physical presence in the state, such as a building or employees, it is required to file a Texas Franchise Tax return.

What if your company wasn’t formed in Texas and doesn’t have a physical presence? There still may be a requirement to file a Texas Franchise Report. Due to the Wayfair sales tax case in 2018, a business could have economic nexus and be required to file a return. According to Texas Franchise Tax Rule 3.586(f)(1), a business has an economic presence in the state of Texas if the gross receipts from business done in Texas is $500,000 or more.

Revenue is determined based on the revenue amounts reported on the Federal income tax return. Exclusions from revenue can include the following:

  • dividends and interest from federal obligations;
  • Schedule C dividends;
  • foreign royalties and dividends under Internal Revenue Code Section 78 and Sections 951-964;
  • certain flow-through funds; and
  • other industry-specific exclusions.

How much tax will a business owe? Let’s start with the businesses that will owe no tax. A business that needs to file the annual Texas Franchise Tax Report will not owe tax if the Texas gross revenue is less than $1,180,000 in either 2020 or 2021. This is considered a “No Tax Due” report.

The Texas Franchise Tax is based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways:

  • total revenue times 70 percent
  • total revenue minus cost of goods sold (COGS)
  • total revenue minus compensation or
  • total revenue minus $1 million.

What if my taxable margin is greater than the $1,180,000 threshold? This could be a difficult answer depending on the type of business industry. There are some deductions and exclusions to the Texas gross revenue that can be claimed.

The general answer to the question is that if a business is retail or wholesale, the tax rate is 0.375% of its Texas margin revenue. All other businesses have a tax rate of 0.75%.

The Texas Franchise Report is similar to the Federal return in that there are exceptions, and the rules are ever changing. Depending on your industry and type of business, it can be incredibly challenging.

Though the Texas Comptroller website does offer a Frequently Asked Questions (https://comptroller.texas.gov/taxes/franchise/faq/reports-payments.php) Section, there is always a topic not covered. Consult your tax professional if you have any questions.

ADKF offers many services that can assist with the Texas Franchise Report filing and other accounting needs you may have. If you have any questions on how we may help, please don’t hesitate to call our office at (210) 829-1300.


ADKF
is the largest, locally owned public accounting firm in San Antonio, Texas, with branch offices in Boerne and New Braunfels. We have been serving our community since 1991. We are a full-service CPA firm dedicated to providing a broad range of tax, audit, bookkeeping, tax controversy, and consulting services with superior customer service to help our clients meet their goals and objectives. Please click here to set an appointment with us.

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