How to File Texas Franchise Tax
What is the Texas Franchise Tax?
The Texas Franchise Tax is levied annually by the Texas Comptroller on all taxable entities doing business in the state. The tax is based upon the entity’s margin, and can be calculated in a number of different ways. Each business in Texas must file an Annual Franchise Tax Report by May 15 each year.
Who Must Pay the Franchise Tax?
- LLCs & Series LLCs
- State Limited Banking Associations
- Savings and Loan Associations
- Professional Corporations
- All Partnerships
- Professional Associations
- Business Associations
- Joint Ventures
- Other Legal Entities
Which Entities Are Excluded?
- Sole Proprietorships (Except Single Member LLCs)
- General Partnerships Owned Directly by a Single Natural Person
- Entities Exempt Under Tax Code Chapter 171, Subchapter B
- Certain Unincorporated Passive Entities
- Certain Grantor Trusts, Estates of Natural Persons & Escrows
- Real Estate Mortgage Investment Conduits
- Certain Qualified Real Estate Investment Trusts
- Non Profit Self-Insurance Trust (Insurance Code Chapter 2212)
- Trusts Qualified Under IRS Code Section 401(a)
- Trusts Exempt Except Under IRS Code Section 501(c)(9)
- Unincorporated Political Committees
Calculating the Franchise Tax
The Texas Franchise Tax is calculated on a company’s margin for all entities with revenues above $1,110,000.
The margin can be calculated in one of the following ways:
- Total Revenue Multiplied by 70 Percent
- Total Revenue Minus Cost of Goods Sold
- Total Revenue Minus Compensation
- Total Revenue Minus $1 Million
How is Total Revenue Calculated?
Total revenue is calculated by taking revenue amounts reported for federal income tax and subtracting statutory exclusions.
Statutory exclusions include:
- Dividends & Interests From Federal Obligations
- Schedule C Dividends
- Foreign Royalties & Dividends (IRS Code Sections 78 & 951-964)
- Certain Flow-Through Funds
- Other Industry-Specific Exclusions
How is the Cost of Goods Sold Calculated?
Cost of goods sold includes costs related to the acquisition and production of tangible personal property and real property. Other allowances are made for specific industries. If your company sells services, it typically will not have a cost of goods sold deduction.
How is a Compensation Deduction Calculated?
Compensation deductions include:
- W-2 Wages & Cash Compensation to Directors/Owners/Partners/Employees
- Benefits Provided to All Personnel to Extent Deductible for Income Tax Purposes
Compensation does not include 1099 labor or payroll taxes paid by the employer.
Available Tax Credits
- Temporary Credit for Business Loss Carryforwards under TX Tax Code Section 171.111
- Research and Development Activities Credit under TX Tax Code Chapter 171, Subchapter M
- Certified Historic Structures Rehabilitation Credit under TX Tax Code Chapter 171, Subchapter S
How to File
There are three ways to file the Texas Franchise Tax Report:
- No Tax Due
- EZ Computation
- Long Form
If your business falls under the $1,110,000 revenue limit, then you don’t owe any franchise tax. If you are above the limit, you can choose to fill out and file the EZ Computation form or to take the time to fill out the Long Form.
You can download the Franchise Tax Report forms from the Comptroller and submit them by mail to the following address:
Texas Comptroller of Public Accounts
PO Box 149348
Austin, TX 78714-9348
If you need more time to file your Franchise Tax Report, you can submit a Franchise Tax Extension with the Comptroller. The Comptroller will generally only accept an extension if 90 to 100 percent of the tax owed is paid by May 15.
There are four different types of Franchise Tax Extensions, depending upon your situation.