Businesses and taxable entities that operate within the State of Texas are required to pay a franchise tax. Franchise tax is separate from federal income tax or other tax obligations. This tax essentially gives you the right to operate from or generate revenue within the state. It is not a tax that operates in all states, however, the Texas Comptroller’s Office requires businesses to pay this tax.
Often, businesses are unaware of this tax obligation, and they do not file franchise tax reports by the due date. Failure to pay or file a franchise tax report can lead to significant penalties and an increased interest rate. Although the tax rate is quite low, if you generate large revenue and face additional penalties and interest, your company could see huge losses for failing to make franchise tax payments.
You also risk losing corporate privileges and the ability to conduct business within the state for failing to meet your tax obligations. As such, it is vital that you pay your Texas state tax obligations each year. If you are unsure about what you need to pay or how to file reports, contact an experienced tax attorney for assistance.
Ronald Arthur Stearns Sr. PLLC
Hiring a qualified local tax attorney is the easiest way to prevent the harsh penalties for failing to pay or file franchise tax reports. Ronald Arthur Stearns Sr. PLLC has been helping businesses and taxpayers in the state of Texas for over 26 years. His decades of litigation and negotiation experience position him as the top candidate to manage and advise you on your taxes.
Navigating the complexities of Texas tax law can be difficult, particularly if you do not have any legal or Tax Code experience. Ronald Arthur Stearns Sr. PLLC wants to take this burden off of you and ensure compliance with tax obligations on your behalf.
If you made a late payment of franchise tax or failed to file by the due date, our law firm can negotiate to get the penalties dropped or reduced. If you lost your corporate privileges because of failure to pay, we can help get your entity reinstated.
Our priority is protecting your best interests and ensuring that you do not face severe penalties or fines because of the local tax system.
What Is Texas Franchise Tax?
The Texas franchise tax, or “privilege tax”, is a tax owed by entities formed or organized in Texas or who conduct business in Texas. A franchise tax is a tax by the Texas Comptroller’s Office for the privilege of conducting business within the state. Not all states have this tax, and it is up to each state to impose this tax on businesses.
Unlike federal income tax, a franchise tax is paid to the state government, rather than the federal government. This means that the Texas Comptroller can decide on the tax rate, the interest rate, the tax due threshold, and which businesses are required to pay the tax. If you want to earn revenue within the state of Texas, or if you want to set up a business in Texas, you must pay for and file an annual franchise tax report.
All taxable entities that have an annual revenue of $1,230,000 or more must pay franchise tax in Texas. The amount of franchise tax you pay is based on your entity’s margin, which can be calculated in several ways. All companies are required to submit an annual franchise tax report on May 15th, regardless of whether your taxable entity falls within the franchise tax requirements.
Who Is Required To Pay Franchise Tax in Texas?
If you are a taxable entity that conducts business in Texas, was formed in Texas, or organized in Texas, then you will probably have to pay a franchise tax to the Texas Comptroller. If you are unsure whether you are subject to this tax, we recommend discussing it with a tax professional.
The chances are that if you make money in Texas, you will have to at least file a franchise tax report each year.
Taxable entities that are definitely eligible for paying franchise tax include:
- Professional corporations
- Partnerships (limited liability, limited, and general)
- Limited liability companies (LLCs)
- State-limited banking associations
- Professional associations
- Joint ventures
- Business associations
- Other legal entities
If your legal entity generates an annual revenue of $1,230,000 or more and is a taxable entity listed above, then you must pay taxes to the Texas Comptroller’s office.
Who Is Excluded From Paying Franchise Tax in Texas?
There are certain entities excluded from paying franchise tax in Texas. Some of these entities are also excluded from paying other types of state business income tax, including sole proprietorships. If your business falls under the exclusion list given by the Texas Comptroller, then you do not have to make franchise tax payments.
The entities excluded from this tax include:
- Sole proprietorships, except single-member LLCs
- Entities that are exempt under Tax Code Chapter 171, Subchapter B
- General partnerships that ownership comprises solely natural persons
- Certain types of unincorporated passive entities
- Certain types of grantor trusts, escrows, and estates that are owned by natural persons
- Non-profit self-insurance trust that was created under the Insurance Code Chapter 221
- Certain types of qualified real estate investment and mortgage investment conduits
- Unincorporated political committees
- Trusts exempt under Internal Revenue Code Section 501 (c)(9)
- Trusts that qualify under Internal Revenue Code Section 401 (a)
If you are unsure whether your legal entity has obligations under franchise tax law, we recommend speaking with a local Texas tax professional. They can advise you on whether your business is excluded from this requirement, and if not, can help you file your franchise tax report. Texas law requires that all entities file a franchise tax report, even if they do not owe money to the government. Failure to do so could lead to penalties and fines.
Cost of Franchise Tax in Texas
The cost of Texas franchise tax depends on the total revenue that your taxable entity generates per year. If you earn more than $1,230,000 in total revenue per year, you have a franchise tax liability. There are certain brackets of this tax, depending on the annual gross receipts of your entity.
A business that has an annual gross receipt of more than $1.18 million will be required to pay Texas franchise tax. The annual gross receipt is calculated based on the total revenue minus certain deductions. The tax rates are:
- Wholesalers and retailers – 0.375% of taxable margin
- All other legal entities – 0.75% of taxable margin
If your gross receipts exceed $10 million, the tax rate is 1%.
Although this may seem like a small percentage, the amount of tax due can become quite substantial if you have large annual gross receipts. For example, if you have $10 million in gross receipts, your franchise tax rate will be $100,000.
Unlike a sales tax, franchise tax comes directly from the business, and entities are required to make franchise tax payments even if they do not make a profit. So, the costs of franchise tax can add up. If you have penalties or fines on top of this for failure to pay or failure to file, the costs can be substantial.
Calculating Texas Franchise Tax
Texas franchise tax is calculated based on the entity’s margin for the year with revenues of over $1,230,000. The total revenue of an entity is calculated based on the revenue reported for federal income tax purposes minus statutory exclusions or deductions. The statutory exclusions that an entity can deduct from its revenue include:
- Schedule C dividends
- Interests and dividends from federal obligations
- Certain flow-through funds
- Foreign royalties and dividends
- Other industry-specific exclusions
Once the total revenue is calculated, the company can then determine its margin by using one of the following methods:
- Total revenue minus 30%
- Total revenue minus the cost of goods sold
- Total revenue minus $1 million
- Total revenue minus compensation
The method that a business in Texas should use is the one that produces the lowest number. Once the lowest number is produced, this margin will be used to determine the amount of franchise tax that an entity should pay.
Total Revenue Minus 30%
The margin of a taxable entity can be determined by misusing 30% of its total revenue.
Cost of Goods Sold Deduction
The cost of goods sold deduction relates to the costs of acquiring, purchasing, or producing goods that the business sells. Goods can include tangible personal property and real property. A cost of goods sold deduction is only available for companies that sell products and tangible personal property. It does not apply to businesses that sell services.
Total Revenue Minus $1 Million
It is possible for an entity to determine its margin by simply subtracting $1 million from its total revenue.
A compensation deduction includes:
- Benefits given to all business personnel to the extent deductible for federal income tax purposes
- W-2 wages and other cash compensation to owners, directors, partners, and employees
A compensation deduction does not include payroll taxes paid by the employer, 1099 labor, or other similar compensation deductions. The compensation deduction limit is $400,000.
Filing a Texas Franchise Tax Report
Before filing your Texas franchise tax report, you need to figure out the best way for your business to file. This can be quite confusing, and we recommend speaking with a local tax professional before filing your franchise tax report. You need to ensure that you have all the necessary documentation and that your paperwork is in order.
Before filing, you must ensure that you have a FEIN (Federal Employer Identification Number). You will need to provide this number on all franchise tax forms you provide to the Comptroller’s Office. If you do not have this number, you will need to contact the IRS through their website to get one.
There are several methods for filing your franchise tax, including through an Approved Electronic Submission Software Provider, through the mail, TeleFile, or the Electronic Data Interchange (EDI) section of the website.
The filing methods for Texas franchise tax can be quite confusing, and trying to figure it out online can often create even more confusion. The law firm of Ronald Arthur Stearns Sr. PLLC can help reduce your confusion and advise you on the best filing method for your business. We can help you file your franchise tax report and organize your documentation.
Documents Required For Your Franchise Tax Report
There are several documents required for your franchise tax report. The type of documentation required depends on the type of entity you are, the tax due, and the type of industry you are in. Some additional documentation you may need for your tax report include:
- Information Report (Common Ownership Information Report or Public Information Report)
- Affiliate Schedule
- Payment form
What Happens If You Don’t Pay Franchise Tax in Texas?
All taxable entities in Texas are required to file franchise tax reports and a public information report, even if they do not have franchise tax obligations. The Texas Comptroller takes tax obligations seriously, and if your business does not meet its obligations, it can face serious penalties and restrictions from conducting business within the state.
Forfeiture of Rights and Privileges
If you do not file a franchise tax annual report within 45 days after the due date, your corporate privileges and rights to conduct business within the state will be forfeited. There are two major consequences of this. The first is that your company will lose its right to sue or defend itself in a court within Texas, and cannot seek affirmative relief in a state court.
The second consequence is that if there are any debts incurred while the corporate privileges are forfeited, officers and directors could be liable for these debts. These debts include the taxes and penalties that are imposed on the business.
Forfeiture of Certificate of Authority
Failure to pay your franchise taxes can also result in your Charter or Certificate of Authority being lost. If you do not revive your corporate privileges by paying the franchise taxes that you owe, the name of your entity will be sent to the Texas Attorney General and Secretary of State.
Once this happens, the Secretary of State can forfeit your Charter, Certificate of Authority, or registration without holding a judicial proceeding. The Attorney General also has the power to sue your entity to get these authorities forfeited.
If your certificate, charter, or registration are forfeited, you become a “terminated entity”. Your entity’s existence is finalized within the state of Texas and you cannot conduct business within the state until you petition to get your rights reinstated.
The consequences of becoming a terminated entity are that you have very limited purposes. The functions you can carry out include:
- Settling any affairs that were not completed before the business terminated
- Winding up affairs
- Prosecuting or defending the businesses’ names
To get your business reinstated after a failure to pay your franchise tax obligations, you will need to hire an experienced tax attorney. The Texas Tax Code governs the process of reinstatement and the Secretary of State is responsible for reinstating legal entities. This process can be quite complex. However, an experienced local tax professional can help you through this process.
Fines, Penalties, and Interest For Failing To Pay Texas Franchise Tax
Besides the loss of your corporate privileges within the state of Texas, legal entities will also face fines, penalties, and interest for not paying Texas franchise tax. If you do not file your franchise tax report, you will face a $50 fine. On top of this, if you do not file or pay the tax, you could face the following penalties:
- A 5% penalty on the amount of franchise tax that you owe if your tax is not paid on the due date
- An additional 5% penalty for failing to pay within 30 days after the due date
- Delinquent penalties accruing interest for failing to pay 60 days after the due date
Can I Get an Extension on Franchise Tax?
All franchise tax reports must be filed by May 15th of each tax year. If you cannot file your franchise tax on this date, it may be possible to request a franchise tax extension. If you do not request a franchise tax extension, and simply do not file your tax returns, you could face a $50 fine.
To apply for an extension, you must submit a request to the Comptroller before or on May 15th, so it is important that you file as early as possible. In most cases, the Comptroller only accepts extension requests when 90 percent or more of the tax due is paid by the 15th of May. If your extension request is accepted, you will have 6 extra months to pay the rest of your tax obligations.
Do All Entities Have To File Franchise Tax Reports?
All entities that operate within the state of Texas, or were formed or organized within the state, must file franchise tax reports. There are some situations in which an entity does not have to file this report, but files an EZ Computation Long Form or a No Tax Due Report instead.
If you have a passive entity in Texas and do not need to make franchise tax payments, you may have to file a No Tax Due Report instead of the franchise tax report. A No Tax Due Report must be filed online and you must qualify for this report. If you are unsure whether you need to file a franchise tax report, contact an experienced tax professional.
Contact Ronald Arthur Stearns Sr. PLLC Today!
Understanding franchise tax obligations in Texas can be quite complicated. As it is separate from federal obligations, businesses need to ensure that they have the correct documentation and that they submit their reports on time. Failure to do so could lead to a loss of their corporate privileges, loss of limited liability protection, and severe penalties.
Hiring an experienced tax professional, like Ronald Arthur Stearns Sr. PLLC, can help prevent the severe consequences of not paying Texas franchise tax. Our law firm has been helping Texas citizens and local businesses for many decades, and we have a deep understanding of local tax laws and obligations.
We can help your business by advising you on how to file your tax report, ensuring that you have the correct documentation, submitting the reports on time each year, and preventing the harsh penalties of failing to pay. If you did not pay on time and have lost your corporate privileges, we can help you get these reinstated with the Secretary of State.
Ronald Arthur Stearns Sr. PLLC is recognized by the American Bar Association and the State Bar of Texas. He has the skills necessary to guide your business through important tax issues and ensure that you do not face harsh penalties.