Texas Franchise/Margin tax reports
Update for 2012: There is now a $50 penalty for missing the deadline!
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. Keep reading for instructions on filling out the Franchise forms.
- If your registered business is having enough gross receipts (roughly, we’re talking $1,000,000 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.
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
Filing simple Texas Franchise tax forms
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?
If you have no business entities at all or you have only a DBA (Doing Business As) – you can forget about the whole thing. Otherwise, you must file 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)
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 absolutely nothing last year – you still need to file the report with all zeroes. It is real easy, please follow detailed instructions below.
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 by May 15, you need to file a Franchise Tax extension.
Do not miss an extension! Beginning 2012, there is a $50 penalty! 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 fromForm 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, addlines 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 “regular” 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.
- There are 3 versions of Tax Report forms, from simpliest to the most frustrating:
- Form 05-163 - No Tax Due Information Report
- Form 05-169 - EZ Computation Report
- Form 05-158 - “Long Form” Tax Report
If your Total Revenue calculated in Step 3 is less than $1,000,000 – 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.
- There are 2 versions of owner reporting, depending on the type of entity:
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.
Step 5 – Where and how to file the forms
You can choose from 3 ways to complete the forms:
- Download forms in “simple PDF”, type into these forms, print them out and mail to the State Comptroller.
- Download forms in “smart PDF” format. This format has some fields automatically populated. When done, you still need to print and mail them.
- 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 – 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:
- A 4-digit SIC code (Standard Industrial Classification code)
- 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 – residential||6514||531110|
|Landlords – apartments||6513||531110|
|Landlords – commercial||6512||531110|
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: 2011
- Due date: 05/16/2011. For newly created entities, the due date will be different.
- Privilege period: 01/01/2011 – 12/31/2011. Yes, it should be 2011 – except for recently created entities.
- File number: you can find it on last year’s report or by searching in the Texas entities database.
- 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: 010110 – 123110. Yes, it should say 2010, 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.