Entities Subject to Franchise Tax
Each taxable entity formed in Texas or doing clientele in Texas must file and pay franchise tax. These entities include :
- limited liability companies (LLCs), including series LLCs;
- state limited banking associations;
- savings and loan associations;
- S corporations;
- professional corporations;
- partnerships (general, limited and limited liability);
- professional associations;
- business associations;
- joint ventures; and
- other legal entities.
See Franchise Tax Rule 3.586 for a list of some activities considered to be “ doing business in Texas. ”
Entities Not Subject to Franchise Tax
The follow entities do not file or pay franchise tax :
Reading: Franchise Tax Overview
- sole proprietorships (except for single member LLCs);
- general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships);
- entities exempt under Tax Code Chapter 171, Subchapter B;
- certain unincorporated passive entities;
- certain grantor trusts, estates of natural persons and escrows;
- real estate mortgage investment conduits and certain qualified real estate investment trusts;
- a nonprofit self-insurance trust created under Insurance Code Chapter 2212;
- a trust qualified under Internal Revenue Code Section 401(a);
- a trust exempt under Internal Revenue Code Section 501(c)(9); or
- unincorporated political committees.
Calculation of the Tax
Franchise tax is based on a taxable entity ’ second margin. Unless a taxable entity qualifies and chooses to file using the EZ calculation, the tax base is the taxable entity ’ south margin and is computed in one of the follow ways :
- total revenue times 70 percent;
- total revenue minus cost of goods sold (COGS);
- total revenue minus compensation; or
- total revenue minus $1 million (effective Jan. 1, 2014).
total gross is determined from gross amounts reported for federal income tax subtraction statutory exclusions .
Exclusions from tax income include the follow :
- 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.
See Tax Code Section 171.1011 and Rule 3.587 for more information about total tax income .
Cost of Goods Sold
cost of goods sold generally includes costs related to the acquisition and production of palpable personal property and substantial property. There are other cost of goods sold allowances for certain industries. taxable entities that alone sell services will not generally have a cost of goods sold subtraction .
See Tax Code Section 171.1012 and Rule 3.588 for more data about monetary value of goods sold .
The compensation discount includes the stick to :
- W-2 wages and cash compensation paid to officers, directors, owners, partners and employees (including net distributive income to natural persons) for the 12-month period upon which the tax is based, subject to the inflation-adjusted per person wage and cash compensation limitation; and
- benefits provided to all personnel to the extent deductible for federal income tax purposes, including workers’ compensation, health care and retirement benefits.
recompense does not include 1099 labor movement or payroll taxes paid by the employer .
See Tax Code Section 171.1013 and Rule 3.589 for more information about compensation .
margin is apportioned to Texas using a single-factor allotment formula based on gross receipts.
See Tax Code Section 171.106 and Rule 3.591 for more data about allotment .
The follow franchise tax credits are available :
taxable entities that are separate of an affiliated group engaged in a unitary clientele must file a combined group report. Members of a compound group must use the like method acting to compute margin .
See Tax Code Section 171.1014 and Rule 3.590 for more information on compound report .
Franchise Tax Returns and Information Reports
Each taxable entity must file a Franchise Tax Report ( No Tax Due, EZ Computation or Long Form ) and an Information Report ( Public Information Report or Ownership Information Report ) .
Franchise Tax Rates, Thresholds and Compensation Deduction Limits
See Tax Rates for information on current and historic tax rate information .
Due Dates, Extensions and Filing Methods
Franchise tax reports are due on May 15 each year. If May 15 falls on a Saturday, Sunday or legal vacation, the future business day becomes the due date .
The Comptroller ’ second function will tentatively grant an extension of time to file a franchise tax report upon timely reception of the appropriate human body. seasonably means the request is received or postmarked on or before the due date of the original report. See franchise Tax Extensions of Time to File for more information .
You can file your franchise tax report, or request an extension of time to file, on-line .
There is a $ 50 penalty for a franchise tax report card filed after the due date, even if no tax is due with that report and even if the taxpayer subsequently files the report.
Visit our web site for more information about the franchise tax, including answers to frequently asked questions .
This publication is intended as a general usher and not as a comprehensive resource on the subjects covered. It is not a substitute for legal advice .
( 08/2019 )