Navigating the complex world of taxes can be a daunting task, especially when it comes to understanding the Texas Franchise Tax and who is subjected to franchise taxes in Texas. Ronald Arthur Stearns Sr. PLLC can explain all the essential aspects of this tax, from understanding its purpose and rates to exemptions and filing requirements. Whether you’re an entrepreneur, an online seller, or a tax professional, Ronald Arthur Stearns Sr. PLLC will equip you with the knowledge you need to confidently navigate the Texas Franchise Tax landscape.
There are various topics to learn such as the difference between franchise tax and sales tax, the calculation process, and the available credits and deductions. In addition, the implications for online sellers and marketplace facilitators, and at Ronald Arthur Stearns Sr. PLLC, how we can help you navigate this complex tax. Don’t hesitate to reach out at 1-512-257-0570 to take the first step toward a comprehensive understanding of your tax obligations and how we can assist your business in meeting them effectively.
Texas Franchise Tax
Texas has a Franchise Tax imposed on business entities that are either formed in Texas or conducting business in the state. The amount is calculated based on their margin. Keep in mind that franchise tax is different from federal income taxes. The tax rates vary depending on the annual revenue of the business and the method of reporting. Generally, the tax rate for most taxable entities is 0.75% of the margin, while the tax rate for entities primarily engaged in retail and wholesale trades is 0.375% of the margin.
The calculation of Texas Franchise Tax involves determining the taxable entity’s margin. This is done by subtracting the greatest of three possible deductions from total revenue: cost of goods sold, total revenue minus compensation, or total revenue minus cost. The threshold for periods commencing on or after January 1, 2022, and before January 1, 2024, is $1,230,000. This is considered the “no tax due” threshold. Businesses holding tangible personal property and other assets in Texas fall under this threshold. Remember that the “no tax due threshold” changes biennially on even years.
Franchise Tax vs. Sales Tax
Franchise Tax and Sales Tax are two distinct taxes that businesses need to be aware of. Franchise Tax is a corporate income tax that applies to various business types, such as corporations, limited liability companies (LLCs), banks, and S corporations. On the other hand, Sales Tax is collected from customers by businesses selling taxable property.
The way these two taxes are calculated isn’t the same. Franchise Tax is calculated based on a company’s margin, with the tax rate varying depending on the type of business. In contrast, Sales Tax is calculated as a percentage of the total revenue reported for federal income tax, with certain exclusions.
Taxable entities, whether formed or operating in Texas, must file and pay the Franchise Tax annually by submitting detailed franchise tax and information reports. On the other hand, businesses are obligated to collect sales tax from their customers at the time of sale and transmit it to the Texas Comptroller of Public Accounts.
Entities Liable for Texas Franchise Tax
All taxable entities established in Texas or conducting business in Texas are required to file and remit franchise tax. The definition of “doing business in Texas” for Franchise Tax purposes encompasses both taxable entities that are chartered or organized in Texas and entities that are not chartered or organized in Texas but have adequate contact with the state. Franchise Tax Rule 3.586 provides a comprehensive list of activities which are regarded as “doing business in Texas”. Consult this rule to get the latest information.
Entities that fail to comply with Texas Franchise Tax laws may incur penalties and interest on past due taxes, including payroll taxes paid late. The penalties range from 5% for paying the tax 1-30 days late, and there may also be a $50 late filing fee/penalty for returns filed after the due date. This is in addition to the privilege tax imposed on certain businesses.
Failure to file tax reports or pay the tax can result in severe repercussions, including loss of the capacity to do business and potential revocation of authorization to operate.
Exemptions and Exclusions
Some entities are exempt from the Texas Franchise Tax. Businesses can be owned in various ways. These include:
- Sole proprietorships
- General partnerships where individuals own the business directly
- Other specified entities such as certain financial services businesses, nonprofits, and others.
To be considered an exempt entity from Texas Franchise Tax, a business must meet certain conditions, including:
- Being a qualified organization such as a school or sports-related organization
- Being a 501(c) organization
- Being an eligible entity outlined by the Texas Comptroller.
The legal formation of the entity determines its filing responsibility for Texas franchise tax.
Calculating the Texas Franchise Tax
The calculation of Texas Franchise Tax involves determining the taxable entity’s margin. This is done by subtracting the greatest of three possible deductions from total revenue: cost of goods sold, compensation, or 30% of total revenue.
Each industry may have specific rules and allowances that affect the calculation of their Texas Franchise Tax. For example, oil and gas extraction companies can take advantage of the cost of goods sold deduction, while other industries may have different deductions available. Understanding the unique calculation requirements for your industry will help you accurately determine your tax liability and take advantage of any available tax savings.
Filing Requirements and Deadlines
Taxable entities are required to file an Annual Franchise Tax Report. The report is due on May 15, or the next business day if that falls on a weekend or holiday. Timely filing of required reports and tax payments is necessary to avoid penalties and interest on overdue taxes. Penalties for late payment of the tax are as follows:
- 5% for paying the tax 1-30 days late
- Additional penalties may apply for longer delays
- There may also be a $50 late filing fee/penalty for returns filed after the due date.
If you’re unable to file the Annual Franchise Tax Report by the due date, it’s possible to obtain an extension. Remember that extensions are not granted automatically but require a request in line with particular guidelines. To avoid penalties and ensure compliance with Texas Franchise Tax laws, it’s always ideal to file your reports and pay the tax on time.
Unitary Groups and Combined Reporting
Unitary groups with a controlling interest from a common owner may file a combined report for Texas Franchise Tax. This concept, initially introduced in Texas, allows unitary groups to streamline their tax reporting and ensure compliance with the tax laws. A taxable entity must belong to an affiliated group involved in a unitary business and required to file a group report to be classified as part of a unitary group.
The definition of a controlling interest in the context of Texas Franchise Tax for unitary groups is the capacity to guide or cause the guidance of the management and policies of a unitary group. It implies having the capability to control the decision-making process and impact the operations of the group. Understanding the requirements and benefits of combined reporting for unitary groups can help businesses effectively manage their tax obligations and compliance with Texas Franchise Tax laws.
Apportionment and Tax Rates
The Texas Franchise Tax uses a single gross receipts factor for apportionment. Texas is allocated margin through a single-factor apportionment formula. This formula takes gross receipts into account. This method ensures that each taxable entity’s tax liability is fairly apportioned according to their business activity within the state.
Different tax rates apply to retailers, wholesalers, and other taxpayers. The current rate for retailers and wholesalers is 0.375%, while other types of businesses are subject to a tax rate of 0.75%. Grasping the specific tax rates and apportionment methods for your industry will enable you to precisely calculate your Texas Franchise Tax liability and comply with tax laws.
Online Sellers and Marketplace Facilitators
Online sellers, remote businesses, and marketplace facilitators with a physical presence or economic nexus in Texas may be subject to Texas Franchise Tax. A physical presence implies that a business possesses a business presence or nexus in the state, such as:
- A kiosk
- An office
- A distribution center
- A sales room
- A sample room
- A warehouse
- A storage place
Furthermore, online purchases and sales are subject to sales tax in Texas.
The economic nexus for remote sellers and marketplace facilitators in Texas is determined according to the sales threshold. Currently, the economic nexus threshold is set at $500,000 in annual Texas sales. If a remote seller or marketplace facilitator exceeds this threshold, they are obliged to collect and remit sales tax in the state. Comprehending the tax implications tied to online sales and marketplace facilitation can assist businesses in adhering to Texas Franchise Tax regulations.
Available Credits and Deductions
The Texas Franchise Tax offers various credits and deductions for eligible businesses, with specific rules and limitations depending on the industry and business type. Some examples of credits include Temporary Credit for Business Loss Carryforwards and cash compensation, while deductions can include the Cost of Goods Sold (COGS) deduction for industries such as oil and gas extraction.
Apprehending the credits and deductions available for your industry and business type is crucial for maximizing tax savings and complying with tax laws. By taking advantage of these tax benefits for federal income tax purposes, businesses can reduce their overall tax liability and invest in growth and development. Understanding the tax code can further assist in this process.
Navigating Changes and Updates
The Texas Franchise Tax has seen several changes and updates since its inception, such as the Sage decision and the AMC decision. Additionally, potential constitutional challenges to the tax have been raised, claiming that the tax contravenes the Texas Constitution’s section on taxation, as well as challenges to the tax’s constitutionality in relation to personal income tax. However, the Texas Supreme Court has determined that the franchise tax is constitutional.
Keeping abreast with the Texas Franchise Tax changes and updates is key for businesses to conform to regulations and evade possible penalties. By keeping up-to-date with policy rulings, constitutional challenges, and other tax-related updates, businesses can better navigate the complex landscape of Texas Franchise Tax and ensure they meet their tax obligations.
How Ronald Arthur Stearns Sr. PLLC Can Help You
Since 1995, Ronald Arthur Stearns Sr. PLLC has been providing service and advocating for Texas taxpayers. With a focus on IRS tax law, our firm offers services such as:
- Tax collection defense
- Collection alternatives
- Audit defense and appeals
- Assistance with IRS tax law
While understanding the complexities of Texas Franchise Tax can be daunting, the assistance of an experienced tax attorney can boost your confidence in addressing tax concerns and resolving potential tax issues.
You don’t have to face your tax challenges alone. By contacting Ronald Arthur Stearns Sr. PLLC at 1 512-257-0570, you can receive the guidance and support necessary to settle your IRS tax obligations and ensure compliance with Texas Franchise Tax laws. Don’t let tax worries weigh you down – let our experienced team at Ronald Arthur Stearns Sr. PLLC help you achieve peace of mind and financial stability.
Frequently Asked Questions
What is the income threshold for Texas franchise tax?
The income threshold for Texas franchise tax is $1,180,000. Businesses with receipts less than this amount pay no franchise tax, while those with receipts between $1,18 million and $10 million are subject to a 0.375% rate.
Is an LLC subject to franchise tax in Texas?
In general, most LLCs in Texas are not subject to franchise tax; however, your LLC must file even if it is not required to pay the tax. To be exempt, your LLC’s total annual revenue must fall below the state’s “No Tax Due Threshold” or other criteria must be met.
What is the no tax due threshold for Texas franchise tax?
The No Tax Due Threshold for Texas Franchise Tax is $1,230,000. Businesses with revenues over the threshold may qualify for various tax rates depending on their industry and total revenue amount, and may file a No Tax Due Report (Form 05-163).
What is the main difference between Texas Franchise Tax and Sales Tax?
The main difference between Texas Franchise Tax and Sales Tax is that Franchise Tax is a corporate income tax while Sales Tax is collected from consumers by businesses selling taxable property.
How is the Texas Franchise Tax calculated?
The Texas Franchise Tax is calculated by subtracting the greatest of three deductions from total revenue (cost of goods sold, compensation, or 30% of total revenue) to determine the taxable entity’s margin.