What is the Texas Franchise Tax?
The Texas Franchise Tax is not a tax only for franchised businesses, but it is a tax imposed on businesses for the privilege of operating in Texas.
The Texas Franchise Tax is one of the many taxes that businesses must pay in order to operate in the state and is based on a business’s gross receipts and the type of business activities.
Who must pay the franchise tax?
Most businesses operating in Texas must pay the privilege tax unless they are specifically exempt. The tax is not imposed on
– Sole proprietorships
– General partnerships directly owned by natural persons, and;
– Other specified entities such as certain financial services businesses, nonprofits, and others.
Generally, corporations and LLCs (Limited Liability Company) will commonly pay the Franchise Tax.
An out-of-state taxable entity that does not have a physical presence in Texas is considered as having nexus and required to pay the Texas Franchise Tax if it had gross receipts of $500,000 or more.
How is the Franchise Tax calculated?
The franchise tax is calculated by taking a business’s gross receipts and multiplying them based on the type of business entity. The franchise tax rate is 0.75% for most businesses and 0.375% for retail and wholesale businesses.
The tax is based upon the entity’s margin and can be calculated in a number of different ways. Margin is the lowest of the following four computations times the apportionment factor.
– Total revenue minus cost of goods sold
– Total revenue minus compensation
– Total revenue minus $1 million, or;
– 70% of total revenue.
Total revenue is calculated based on the taxpayer’s federal income tax return.
There is a deduction for compensation and benefits which include W-2 wages, cash compensation, and benefits including workers’ compensation, health care, and retirement benefits. Compensation does not include 1099 labor or payroll taxes paid by the employer.
Taxable entities with annualized total revenue of $1,180,000 or less owe no tax. Taxable entities who calculate their tax due to be less than $1,000 will owe no tax. However, all taxable entities, including those that will owe no tax, must file a return.
Which entities are excluded from the Texas Franchise Tax?
Certain legal entities are exempt from the franchise tax, including charities, most governmental entities, and some types of non-profit organizations.
In addition, Texas corporations that are solely engaged in manufacturing, selling, or installing solar energy devices are exempted from the franchise tax.
What happens if I don’t pay the Texas Franchise Tax?
If you don’t pay the franchise tax, your business may be subject to penalties, interest, and fees. In severe cases, the state can shut down your business.
When is the Texas Franchise Tax due?
The Texas Franchise Tax Report and franchise tax payment are due May 15th of each year. If the deadline falls on a weekend or holiday, the due date will be the next business day.
How is the Texas Franchise Tax filed?
The Annual Franchise Tax Report and franchise tax payment are sent to the Texas Comptroller of Public Accounts online, by mail, or in person.
If my company doesn’t owe the franchise tax, do I still have to file a report?
Yes. All businesses that are required to pay the franchise tax must file Form 05-163, Texas Franchise Tax No Tax Due Information Report with the Texas Comptroller’s Office if tax isn’t owed.
For more information on the franchise tax, visit the Texas Comptroller’s website or read the Texas Franchise Tax Guide.