taxes

Franchise Tax Frequently Asked Questions

Combined Reporting

In determining which entities must be included in a combined group, is an individual ever considered the owner of stock or of interest in an entity that family members own?

An individual is considered to own the stock or interest in an entity that his or her spouse owns. There is no attribution of ownership for any other family members.

Does a combined group include entities that do not have nexus in Texas?

Yes, an entity meeting the ownership and unitary criteria is included in the combined group regardless of whether the entity has nexus in Texas.

Does the no-tax-due threshold apply to the individual members of the combined group or the combined group as a whole?

The no-tax-due threshold applies to the combined group as a whole. For example, for report years 2016 and 2017 even if one member of a combined group has less than or equal to $1,110,000 in annualized total revenue on its own, that member must still be included in the combined group report.

If individual members of a combined group qualify for different tax rates, how is the tax rate determined for a combined group?

To determine whether the combined group is primarily engaged in retail or wholesale trade and therefore allowed the 0.375 percent rate, the combined group must meet all the qualifying criteria in Texas Tax Code 171.002(c) using the total revenue for the combined group as a whole after subtracting total revenue received from a member of the combined group.

How does the reporting entity of a combined group determine an appropriate Standard Industrial Classification (SIC) code for the group if its members have different SIC codes?

The reporting entity of a combined group selects an SIC code that is appropriate for the group based on the primary business activity of the combined group. The primary activity is determined by the total revenue of the combined group after subtracting total revenue received from a member of the combined group.

How does a combined group determine its accounting period?

If two or more members of a combined group file a federal consolidated return, the group's accounting period is the federal taxable period of the federal consolidated group. In all other instances, the accounting period is the federal taxable period of the reporting entity.

How does a combined group handle members with different accounting periods?

If the federal taxable period of a member differs from the federal taxable period of the combined group, the reporting entity will determine the portion of that member's revenue, cost of goods sold, compensation, etc. to be included. This reporting entity prepares a separate income statement based on federal income tax reporting methods for the months included in the group's accounting period.

How will adding members with no Texas receipts affect the calculations?

A member of a combined group that does not have nexus in Texas is included in the calculation of total revenue, margin and gross receipts everywhere. However, the member is not included in the calculation of Texas receipts.

If an entity is acquired by a combined group, is the entity required to file a short period franchise tax report?

The following example shows how an entity should file in this situation.

  • Corporation A is a separate entity from Jan. 1, 2013, through June 30, 2013.
  • On July 1, 2013, Corporation A was acquired by Group X and is owned by them until Sept. 30, 2013. Group X has a March 31, 2013, accounting year end.
  • On Oct. 1, 2013, Corporation A is sold by Group X to Group Z.
  • Group Z has a Dec. 31 accounting year end.
  • Corporation A had $600,000 in total revenue for the period of Jan. 1, 2013, through June 30, 2013.

All entities/groups will file 2014 annual reports based on the following accounting periods:

  • Corporation A will file on its own for the period Jan. 1, 2013, through June 30, 2013. It does not qualify for a No Tax Due Information Report based on total revenue. Its annualized total revenue is $1,209,945, which exceeds the $1,080,000 threshold.
  • Group X group will file a combined report on May 15, 2014, based on the period April 1, 2012, through March 31, 2013. It will not include Corporation A in the 2014 report, because Corporation A was not part of the group during the period upon which the tax is based. It will include Corporation A in its 2015 annual report for the period July 1, 2013, through Sept. 30, 2013.
  • Group Z will file a combined report on May 15, 2014, based on the period Jan. 1, 2013, through Dec. 31. 2013, and will include Corporation A's data for the period Oct. 1, 2013, through Dec. 31, 2013.
If a member of a combined group is required to pay by electronic funds transfer, does the combined group have to pay by electronic funds transfer?

Yes, if any one member of a combined group receives notice that it is required to electronically transfer franchise tax payments, then the combined group is required to electronically transfer payments.