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Filing simple Texas Franchise tax forms after 2007

In 2006, Texas Franchise Tax has been completely revised: more entities included, new calculations, new rates, new forms. If you are not familiar with the new rules, read my Franchise/Margin Tax Overview article. In this article, you will find instructions on how to fill out the required forms - if your situation is simple.

One confusing term to clarify: Margin Tax. There is no such thing as "Margin Tax." This term refers to the Franchise Tax, since the new rules are based on a calculation called "margin." However, officially, it is still called Franchise Tax.

Step 1 - Are you subject to Franchise Tax?

You are - if you own one of the following business entities:

• LLC (Limited Liability Company), even single-member LLC
• Corporation (either C-corporation or S-corporation)
• LP (Limited Partnership)
• FLP (Family Limited Partnership)

If you have no business entities at all or a DBA (Doing Business As) only - you can forget about the whole thing.

Warning: Even if you do not owe any tax, you still MUST file two reports. Yes, even if your company was not doing anything! Otherwise, your business entity will become "not in good standing" with the State of Texas. It means that you will have problems with banking, with getting a loan, and will probably lose your legal liability protection. This is serious stuff!

Step 2 - Are you ready to file or do you need an extension?

If your company did at least some business last year - meaning it sold a property or collected some rent or received some other money - you will need to put numbers on your Franchise Tax Report. It does not matter whether or not your business was profitable. All you are asked here is: did your business receive any money during last year? If yes - you need numbers. These numbers come from your IRS tax return. If your IRS return is not ready, you need to file a Franchise Tax extension.

Franchise extension gives you time until November 15 while keeping you in good standing with the State of Texas.

Completing the Extension Request - Form 05-164 - is a no-brainer. Read Steps 5 and 7 below for information on how to access the forms and obtain whatever little information is needed for the extension.

Step 3 - Determine your "Total Revenue" (TR)

The instructions below are simplistic and do not cover all possible situations. You may need to modify the calculations suggested below, so use them for an estimate only. For more detail, consult the official Franchise Tax Report instructions.

• If your company did not do any business - your TR is $0



• If you have a single-member LLC or husband-wife LLC that holds rental properties, your business is reported on Schedule E of your Individual tax return - Form 1040. Your TR will be your total rent, found on line 3 of Schedule E, in the "Totals" column. If you sold a rental, add to the total rent line 17 from Form 4797 - "Sales of Business Property."



• If you have a single-member LLC or husband-wife LLC that does business other than rental properties, your business is reported on Schedule C of your Individual tax return - Form 1040. Your TR will usually be line 3 of Schedule C.



• If you have an LP, an FLP, or a multi-member LLC (other than husband-wife) - your company files a Federal Partnership tax return - Form 1065. Your TR is the total of the following lines from Form 1065: lines 1c, 4, 6, 7. To that number, add lines 3a and lines 5 thru 11 from Schedule K of Form 1065. Finally, if your partnership holds rental properties, add line 17 from Form 8825.



• If you have an S-corporation - your company files Federal S-corporation tax return - Form 1120S. Your TR is the total of the following lines from Form 1120S: lines 1c, 4, 5. To that number, add lines 3a and lines 4 thru 10 from Schedule K of Form 1120S. Finally, if your S-corporation holds rental properties, add line 17 from Form 8825.



• If you have a C-corporation - your company files Federal C-corporation tax return - Form 1120. Your TR is the total of the following lines from Form 1120: line 1c and lines 4 thru 10.

Step 4 - Which forms to file

Generally, you need to file two forms: one reports income, and the other reports owners.

1. There are 3 versions of Tax Report forms, from simpliest to the most complete:
   • Form 05-163 - No Tax Due Information Report
   • Form 05-169 - EZ Computation Report
   • Form 05-158 - "Long Form" Tax Report - page 1 and page 2
   
   

   If your Total Revenue calculated in Step 3 is less than $300,000 - you owe zero tax, and you can follow the rest of these instructions to file a "No Tax Due Information Report." Otherwise, I suggest that you file for an extension and seek professional help.

2. There are 2 versions of owner reporting, depending on the type of entity:
   • Form 05-102 - Public Information Report - for LLCs and corporations
   • Form 05-167 - Ownership Information Report - for partnerships

If your company was recently formed and has never filed a Franchise tax report before - you will need slightly different versions of the forms, called Initial Reports. For new companies, the rules are more complicated. If you get confused by reading the official Franchise Tax Report instructions - then you may have to hire a professional tax preparer.

To make things even more stressful, the new rules require aggregate reporting for so-called "combined groups" of entities. These rules are extremely confusing, and additional forms are required. If you have multiple entities for your real estate business - I strongly suggest you consult a tax expert. This is not a do-it-yourself project.

Finally, if you're comfortable with computers, know that all these - allowing you to type into the forms directly rather than having to print out the forms and fill them out by hand.

Step 5 - Where and how to file the forms

You can choose from 3 ways to complete the forms:

1. Print out blank forms, fill them out by hand and mail to the State Comptroller.
2. Download forms in "smart PDF" format. This format allows you to type into the forms directly and save them. When done, you will need to print the forms, sign and mail them.
3. You can file the reports online, using the new WebFile service from the Comptroller.

The online method is certainly the best. Not only you avoid the hassle of printing and mailing, but the forms will be pre-filled with the data about your company.

If you have previously filed Franchise tax reports online, you need to remember your password. If this will be your first time, than you will need to set up an account - which requires two numbers: your 11-digit state Taxpayer number (different from the Federal EIN used for the IRS!) and WebFile number, starting with letters "XT" and followed by 6 digits. Both numbers should be at the right top corner of a 1-page letter sent to you by the State Comptroller earlier in the year.

If you do not have the Comptroller's letter or do not remember your WebFile password - call 1-800-252-1381 for help.

To use either "Smart PDF" forms or WebFile service, you must have Acrobat Reader version 8 - which is a free download.

Step 6 - Determining the Industry codes

The new forms require you to enter 2 different codes for the type of business you are in:

1. A 4-digit SIC code (Standard Industrial Classification code)
2. A 6-digit NAICS code (North American Industry Classification System code)

You need to have both codes, not one of them. Unlike in the past, without these codes your forms will be rejected.

Below, I list the most common codes for real estate investors - residential only. Commercial real estate uses different codes. If you do not see yours on the list, please do your own search using the two links above.

Type of business	SIC	NAICS
Landlords	6519	531110
Realtors	6531	531210
Property managers	6531	531311
Wholesalers	6531	531390
Rehabbers	6531	236118
Mixed bag	6531	531390

Step 7 - Completing the No Tax Due Information Report - Form 05-163

• Taxpayer number: an 11-digit number assigned by the State (not the IRS-assigned EIN!). If you do not know your number, you can find it online by searching your company name in the Texas entities database.
• Report year: 2008
• Due date: 05/15/2008 (there was a grace period until 06/16/2008). For newly created entities, the due date will be different.
• Privilege period: 01/01/2008 - 12/31/2008. Yes, it should be 2008 - except for recently created entities.
• File number: you can find it on last year's report or by searching in the Texas entities database.
• Election: 70% of revenue
• SIC & NAICS codes: see Step 6 above. These two codes are required.
• Blacken if corporation or LLC: blacken the circle.
• Lines 2 and 3: blacken one of these two options. See Step 3 above.
• Lines 5a and 5b: 010107 - 123107. Yes, it should say 2007, the prior year - except for recently created entities.
• Lines 6: Total Revenue determined during Step 3 above.

Step 8 - Completing Public Information Report - Form 05-102 or Ownership Information Report - Form 05-167

Public Information report is required for all LLCs and corporations. For corporations, list all officers and directors. For LLCs that are professionally managed, list all managers. For LLCs managed by members, list all members.

Ownership Information report is required for all partnerships. List all general partners plus all limited partners who have at least 10% ownership. By "FEI number" they mean the federal tax ID: EIN for companies or SSN for individual partners.

You may view the previously filed report in the Texas entities database. Just search by company name and click on "Officers and Directors Information" button. While there, you will also see:

• Taxpayer number
• File number
• Address on file
• Registered agent and registered office

If you use WebFile service, this data will be pre-entered on your reports.