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Print PageTexas Franchise/Margin tax, after 2007
Texas. Summer 2006. Hot as usual. But not business as usual. The state legislature "fixed up" (for lack of a better printable word) taxation of Texas businesses. The first reports under the new system were due on May 15, 2008. If you knew the old (pre-2007) system, you may want to scroll to the bottom of this page and study the table comparing old and new systems.
A little terminology trivia: you may hear the new system called "Margin Tax." While it is, in fact, based on a fuzzy concept called "margin", the official name for this tax is "Texas Franchise Tax" - same name as before.
So, what does Texas want from you today? In a nutshell ("nut" is an appropriate word here), here is the answer:
- If you have no business, or if your business is not registered with the state
of Texas, or if you only have a DBA - Doing Business As (officially called an
"assumed name") -
do not worry about this Franchise tax; it does not apply to you. - If you are registered with the State of Texas as an LLC, a partnership, or a Corporation - you must submit annual reports to the State of Texas. Usually, the deadline is May 15, except for the very first "initial report". For instructions on filling out the Franchise forms, see my related article.
- If your registered business is having enough gross receipts (roughly, we're talking $500,000 or more in sales) - you may owe Texas some money.
Single-member LLC warning: You probably know that one-person LLCs and husband-wife LLCs, both called "single-member LLC" are exempt from IRS reporting. But this is Texas, not the IRS! All LLCs must file a Texas Franchise tax report, even single-member LLCs.
Gross receipts warning: The tax is based on gross receipts and has very little to do with your expenses. It is about volume, not profitability.
Landlord warning: For the Franchise Tax, you count gross rents, before any expenses. This is totally different from the IRS tax! Your apartment complex may show zero tax to the IRS, but you may still owe Texas Franchise tax which does not let you offset rent with expenses.
"Who cares" warning: You should care. Even if you do not owe any money, you owe Texas couple pieces of paper. If you do not submit those, the state will soon place you in "bad standing" with the state. You will learn about the consequences when you visit your bank for a loan and they turn you down - or when they freeze your business account.
This table summarizes some key provisions of the new Franchise/Margin tax - as they compare to the old Franchise tax. Can't quite say "enjoy", but at least have a look.
Franchise Tax (old) |
Margin/Franchise Tax (new) |
|||
| Entities taxed | Corporations and LLCs | Corporations, LLCs, and most partnerships | ||
| Entities excluded | Partnerships | General partnerships and "passive" partnerships (watch the new definition!) | ||
| Grouping of entities | Per entity | Aggregate for related groups of entities (unclear) | ||
| Tax calculated based on | Net profit or, in case of large corporations, net profit plus compensation |
Gross revenue minus either
|
||
| Tax rate | 4.5 % |
0.5 % for retail/wholesale 1.0 % for every other business |
||
| Exemption for minimum income level | $150,000 | $300,000 | ||
| Exemption for minimum tax amount | $100 | $1,000 | ||
Definition of "passive" entity:
- General or limited partnership
- 90% of income comes from interest, dividends, royalties, partnership income distributions, gains from real estate sales, etc.
- But not from active trade or business and not from rent