State businesses have several tax requirements under state and federal law. If you operate a business in the United States, you must abide by IRS business taxes plus local state income tax. In the State of Texas, businesses do not have to pay a separate state income tax. However, if you own a business that generates a certain level of gross income, you must pay a franchise tax to the State Comptroller’s Office.
Entities that meet the franchise tax requirements and generate a certain level of revenue annually must pay this state levy. Failure to pay franchise tax could lead to severe penalties and an increased interest rate for the time that you do not pay. You could easily become subject to a comptroller audit, which could lead to harsh penalties.
Filing franchise tax returns can be quite complicated, particularly if you are unsure of the franchise tax rates in Texas, do not have an entity present in the state, or are unfamiliar with state tax rules. Hiring an experienced tax attorney can help you understand Texas’ franchise tax laws better and ensure that you are not incorrectly filing your tax report.
Ronald Arthur Stearns Sr. PLLC
Ronald Arthur Stearns Sr. PLLC is a dedicated taxpayer advocate that can help your business meet franchise tax obligations in Texas. Navigating these matters alone can be quite confusing, and you are more likely to make a mistake in reporting or incorrectly file taxes without legal help.
Our law firm wants to help ensure that you do not face harsh penalties and consequences for incorrectly filing franchise tax returns. If you have been selected for an audit, we want to help you prepare and get your documentation in order to avoid serious penalties.
Ronald Arthur Stearns Sr. PLLC can help your business by advising you on your tax obligations, submitting tax returns and reports on your behalf, ensuring that you meet state and federal obligations to prevent penalties, and representing your business in the event of an audit.
With over 26 years of litigation experience in Texas tax matters, we have the experience and skills necessary to get a positive outcome for your case.
Franchise Tax Explained
Franchise tax is a state tax imposed on entities that conduct business within the state. It is an additional fee for businesses to the sales tax and is similar in some ways to income taxes. Franchise tax is separate from income tax, however, and if you have an entity that conducts business in the state, you must check whether your business is required to pay this additional tax.
Corporate franchise taxes do not exist in all states and it is up to the local government whether to apply this tax. States determine franchise taxes, including the minimum franchise tax, the tax rate, and which businesses must pay franchise taxes. Businesses that are subject to franchise tax must pay by or on May 15th of the tax year.
In Texas, business entities must pay a franchise tax to the State Comptroller’s Office if they earn a certain amount of revenue. A company with an annual gross receipt of more than $1.18 million in Texas is subject to franchise tax. The rate for wholesalers and retailers is 0.375% of their taxable margin. The rate for all other taxable entities is 0.75% of their taxable margin. If you have gross receipts of more than $10 million, the tax rate is 1%.
Corporate Franchise Taxes vs. Federal Income Tax
Companies in Texas must pay several types of taxes, and keeping taxes in order can be confusing. Businesses often confuse federal income tax with franchise tax, as it is difficult to understand where the taxes should be paid from. The primary difference between corporate franchise taxes and federal income taxes is that income tax is a tax imposed on your profits, whereas franchise tax is not.
Generally speaking, only corporations, or entities regarded as corporations for federal income tax purposes, are required to pay income taxes. Companies that do not generate a profit do not have to pay income tax. The owners of partnerships or sole proprietorships are required to pay income tax, rather than the business itself.
In comparison, franchise taxes are imposed on all businesses that generate a certain amount of revenue, regardless of whether they make a profit. A franchise tax is imposed by the state authorities and allows taxable entities to conduct business within the state. It can often affect a business’s revenue more than an income tax and applies to more than just corporate entities.
Who Has To Pay Franchise Tax in Texas?
If you are a taxable entity that conducts business within the State of Texas that has an annual revenue of over $1,230,000, you will probably have to pay franchise taxes. The types of entities that must pay this tax in Texas include:
- Limited liability companies or limited liability corporations (LLCs)
- Partnerships (including limited liability partnerships)
- Joint ventures
- Business associations
- Professional corporations
- Savings and loan associations, such as credit unions
- Other legal entities
However, there are also some entities that do not have to pay franchise taxes and other types of state business income tax, including sole proprietorships, nonprofit entities, entities exempt under Tax Code Chapter 171, unincorporated passive entities, a trust that qualifies under Internal Revenue Code Section 401 (a), and natural persons real estate entities.
If you are unsure whether your business is subject to franchise tax in Texas, it is best to contact a local tax professional. Ronald Arthur Stearns Sr. PLLC can assess the type of business or entity that you have and guide you on your franchise tax obligations.
Calculating Franchise Taxes in Texas
States base franchise taxes on a business’s taxable entity margin. In Texas, this taxable entity margin is defined as the business’s total revenue minus a deduction, as provided by the State Comptroller’s Office. The deduction can be:
- Cost of goods sold – This is the primary deduction used for an estimated tax deduction. The cost of goods sold refers to the money spent by a company on buying and producing tangible or personal property.
- Compensation – W-2 wages, compensation, and benefits paid to those in the company. This does not include payroll for employees.
- 30% of their total revenue – A business can determine its margin by subtracting 30% of its total revenue from that tax year.
- $1 million – Margin rates can also be calculated by deducting $1 million from their total revenue.
Once you calculate your taxable entity margin based on the total revenue minus deductions, you will know whether your business owes franchise tax. If your business earns more than $1,230,000 in revenue per year, you must pay a franchise tax to the Texas government. An experienced attorney can help calculate your rate and determine how much franchise tax you must pay.
My Business is Not in Texas, Do I Still Have To Pay Franchise Taxes?
As of 2020, the law on who has to pay franchise taxes in Texas has changed. Previously, if you did not have a physical business entity in Texas, you did not have to pay franchise taxes. This meant that you could carry out business in Texas, with your company outside state lines, and not have to pay the relevant franchise tax.
However, after adopting a Supreme Court decision in 2020, the State of Texas decided that any business with annual gross receipts of $500,000 or more from business conducted in Texas must pay franchise taxes.
The consequence of this is that businesses with no physical presence within the state must also pay franchise tax if their profits made within the state exceed this limit. Entities exempt from franchise tax previously must now ensure that they pay franchise taxes to the State of Texas.
Consequences of Not Paying Franchise Tax
By not paying franchise taxes, you expose your company to penalties and fines. As a business that operates in Texas, you are required to submit a franchise tax report each year. Even if you do not owe money, you risk a $50 fine for filing the report late. If you need an extension for the report, it is important that you request one before you receive a fine.
The penalties for late payment of franchise tax include:
- 5% penalty for the tax due by the due date
- 10% penalty for tax paid up to 30 days after the due date
- Delinquent taxes after 60 days of failure to pay
If you do not pay the franchise tax that you owe for over 61 days, your business faces interest being added to the franchise tax rates. The interest you face depends on the annual tax that you owe and your particular circumstances. You may also face a 10% late fee for non-compliance, which will be based on an estimate of the franchise taxes that you owe.
What Triggers Franchise Tax?
Franchise tax is triggered if you are a taxable entity formed in or carrying out business in the State of Texas with an annual revenue of over $1,230,000. If you fall within this franchise tax bracket, you have a duty to file and report franchise tax each year to the State of Texas. If you do not uphold your tax duties, you could face serious penalties and interest rates.
Understanding franchise tax can be quite confusing, particularly if you do not understand local Texas state tax laws, or if your primary business is not based in Texas.
A local Texas lawyer can help you with franchise tax by advising you on your tax rate, helping you submit a tax return, ensuring that you meet the minimum tax obligations, and defending you in any audits brought against you.
Contact Ronald Arthur Stearns Sr. PLLC Today!
Ronald Arthur Stearns Sr. PLLC has been helping the taxpayers of Texas with all tax matters for over 26 years. He has a deep understanding of local state and IRS federal laws and can help you and your business deal with important tax issues.
Our law firm understands the difficulties faced by businesses and taxpayers in Texas, and we want to do everything we can to avoid you facing penalties and fines. We will dedicate our time and skills to ensure that your taxes are in order and you do not face penalties for failing to pay franchise tax.
Ronald Arthur Stearns Sr. PLLC has been recognized by the State Bar of Texas and the American Bar Association and has considerable experience helping clients with matters similar to yours.