taxes

Franchise Tax Frequently Asked Questions

Total Revenue

How is total revenue calculated?

Total revenue for Texas franchise tax, specifically defined in TTC 171.1011, is tied to the amounts entered on specified lines from the federal return as they were on the 2006 IRS forms and on 2006 equivalent IRS line numbers on any subsequent version of the corresponding form. TTC 171.1011(b).

Note that the line numbers referred to in the statute and administrative rules are not revised annually to reflect changes in the IRS forms. The online franchise tax instructions are revised as soon as possible after an IRS form change.

If you reduce your property taxes and insurance expense for IRS reporting purposes for the amount of reimbursements received from tenants, can you also exclude these reimbursements from total revenue for Texas margin tax purposes?

According to CFR §1.61-8(c), "As a general rule, if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor…" Total revenue for franchise tax reporting is specifically defined in TTC §171.1011 and is tied to the amounts entered on specific lines from the federal return, to the extent the amount entered complies with federal income tax law, minus statutory exclusions. Based on the above IRS regulation, the reimbursement of expenses should be reported for federal tax purposes in gross rental income and not offset with the expenses. Therefore, for franchise tax reporting purposes, the expense reimbursements are included in total revenue.

Can a bank reduce total revenue by the amount of principal repayment taken as a bad debt?

Bad debt expensed for federal income tax purposes that corresponds to items of gross receipts included in total revenue for the current reporting period or a past reporting period may be excluded from total revenue. The principal repayment of a loan is not included in total revenue and therefore cannot be excluded from total revenue as a bad debt.

Can a professional employer organization or temporary employment service company deduct 1099 labor from total revenue?

A professional employer organization or temporary employment service company may deduct from revenue the actual amounts a client company reimburses for wages reported on W-2s, payroll taxes and employee benefits, including workers' compensation. 1099 labor is not considered wages under the IRC or the TTC Chapter 171 and cannot be excluded from revenue.

When can an attorney take the $500 pro bono services case exclusion from total revenue?

To take the $500 credit per pro bono case, the attorney must maintain records and must report the pro bono hours to the State Bar. The $500 deduction can be taken based on the period when the first hours are reported to the State Bar.

How should negative net distributive income (NDI) be treated when computing total revenue?

If NDI is a negative number, treat it as a negative number when computing total revenue. Only subtract NDI to the extent it is included in total revenue. You should only exclude from revenue the income items; there is no "exclusion/deduction" for the expense items, because the expense items were not included in revenue.

How does a homeowners association that is not exempt from franchise tax compute total revenue for franchise tax reporting purposes?

A taxable entity that is a homeowners association and files IRS Form 1120-H computes total revenue based on the amounts reportable as income on Lines 1-7 of Form 1120-H. If a homeowners association files IRS Form 1120, total revenue is computed based on the amounts reportable as income on Lines 1c and Lines 4 through 10 of Form 1120.

For a taxable entity that owns an interest in a passive entity, is the taxable entity's share of net income of the passive entity excluded from total revenue?

Under TTC 171.1011(e) a taxable entity can only exclude from total revenue the taxable entity's share of net income of the passive entity if the margin of a taxable entity generated the net income of the passive entity. Therefore, a taxable entity that owns an interest in a passive entity may only exclude from total revenue, to the extent included:

  • the taxable entity's share of net income of the passive entity from dividends,
  • distributive shares of partnership income if the partnership is a taxable entity and
  • income from a limited liability company (LLC), if the LLC is a taxable entity.
Is the federal election for deferral of cancellation of debt income (COD) (effective Jan. 1, 2009) disregarded for Texas franchise tax purposes? Can a taxpayer use the numbers actually reported on the line items of the federal return that take into account this deferral?

The American Recovery and Reinvestment Act of 2009 (effective Jan. 1, 2009), Section 1231 provides for a deferral of recognition of COD income. Total revenue for Texas franchise tax is calculated based upon the Internal Revenue Code (IRC) of 1986 in effect for the federal tax year beginning on Jan. 1, 2007, not including any changes made by federal law after that date, and any regulations adopted under that code applicable to that period. See TTC 171.0001(9). As the federal election for deferral of COD income was effective Jan. 1, 2009, the federal election is disregarded for Texas franchise tax purposes. You must adjust the amounts reported on the federal line items when computing total revenue.

Where can a taxpayer find information about the Comptroller's certification of oil and gas prices?

TTC Sections 171.1011(r) and (s) allow an exclusion from total revenue for revenue received from oil or gas produced by a low-producing well (described in the next FAQ) during the Comptroller-certified dates when the monthly average closing price of West Texas Intermediate crude oil is below $40 per barrel or the average closing price of gas is below $5 per MMBtu, as recorded on the New York Mercantile Exchange (NYMEX).

The Comptroller certifies and publishes this information on a monthly basis in the Texas Register.

What is a low-producing well for purposes of the oil and gas revenue exclusion?

According to TTC Section 171.1011(r):

  • A low-producing oil well is a designated oil well whose production averages less than 10 barrels a day over a 90-day period. The 90-day period for an oil well is the certified month when the average closing price of oil is below $40 per barrel and the prior two calendar months.
  • A low-producing gas well is a designated gas well whose production averages less than 250 mcf a day over a 90-day period. The 90-day period for a gas well is the certified month when the average price of gas is below $5.00 per MMBtu and the prior two calendar months.