Texas Comptroller of Public Accounts

Texas Comptroller of Public Accounts, Glenn Hegar

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Franchise Tax Overview
January 2016

This information applies to reports originally due on or after Jan. 1, 2008, unless otherwise noted.

Entities Subject to Franchise Tax

Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:

  • corporations;
  • limited liability companies (LLCs), including series LLCs;
  • banks;
  • state limited banking associations;
  • savings and loan associations;
  • S corporations;
  • professional corporations;
  • partnerships (general, limited and limited liability);
  • trusts;
  • professional associations;
  • business associations;
  • joint ventures; and
  • other legal entities.

See Franchise Tax Rule 3.586 for a list of some activities considered to be “doing business in Texas.”

Entities Not Subject to Franchise Tax

The following entities do not file or pay franchise tax:

  • sole proprietorships (except for single member LLCs);
  • general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships);
  • entities exempt under Tax Code Chapter 171, Subchapter B;
  • certain unincorporated passive entities;
  • certain grantor trusts, estates of natural persons and escrows;
  • real estate mortgage investment conduits and certain qualified real estate investment trusts;
  • a nonprofit self-insurance trust created under Insurance Code Chapter 2212;
  • a trust qualified under Internal Revenue Code Section 401(a);
  • a trust exempt under Internal Revenue Code Section 501(c)(9); or
  • unincorporated political committees.

Calculation of the Tax

Margin

Franchise tax is based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways:

  • total revenue times 70 percent;
  • total revenue minus cost of goods sold (COGS);
  • total revenue minus compensation; or
  • total revenue minus $1 million (effective Jan. 1, 2014).

Total Revenue

Total revenue is determined from revenue amounts reported for federal income tax minus statutory exclusions.

Exclusions from revenue include the following:

  • dividends and interest from federal obligations;
  • Schedule C dividends;
  • foreign royalties and dividends under Internal Revenue Code Section 78 and Sections 951-964;
  • certain flow-through funds; and
  • other industry-specific exclusions.

See Tax Code Section 171.1011 and Rule 3.587 for more information about total revenue.

Cost of Goods Sold

Cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and real property. There are other cost of goods sold allowances for certain industries. Taxable entities that only sell services will not generally have a cost of goods sold deduction.

See Tax Code Section 171.1012 and Rule 3.588 for more information about cost of goods sold.

Compensation

The compensation deduction includes the following:

  • W-2 wages and cash compensation paid to officers, directors, owners, partners and employees (including net distributive income to natural persons) for the 12-month period upon which the tax is based, subject to the inflation-adjusted per person compensation limitation; and
  • benefits provided to all personnel to the extent deductible for federal income tax purposes, including workers’ compensation, health care and retirement benefits.

Compensation does not include 1099 labor or payroll taxes paid by the employer.

See Tax Code Section 171.1013 and Rule 3.589 for more information about compensation.

Apportionment

Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts.

See Tax Code Section 171.106 and Rule 3.591 for more information about apportionment.

Available Credits

The following franchise tax credits are available:

Combined Reporting

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. Members of a combined group must use the same method to compute margin.

See Tax Code Section 171.1014 and Rule 3.590 for more information on combined reporting.

Franchise Tax Returns and Information Reports

Each taxable entity must file a Franchise Tax Report (No Tax Due, EZ Computation or Long Form) and an Information Report (Public Information Report or Ownership Information Report). See Which Form Should I File? to learn more about these different reporting options.

Franchise Tax Rates, Thresholds and Compensation Deduction Limits

See Tax Rates for information on current and historic tax rate information.

Due Dates, Extensions and Filing Methods

Franchise tax reports are due on May 15 each year. If May 15 falls on a Saturday, Sunday or legal holiday, the next business day becomes the due date.

The Comptroller’s office will tentatively grant an extension of time to file a franchise tax report upon timely receipt of the appropriate form. Timely means the request is received or postmarked on or before the due date of the original report. See Franchise Tax Extensions of Time to File for more information.

You can file your franchise tax report, or request an extension of time to file, online.

There is a $50 penalty for a franchise tax report filed after the due date, even if no tax is due with that report and even if the taxpayer subsequently files the report.

Questions?

Visit our website for more information about the franchise tax, including answers to frequently asked questions.

Disclaimer

This publication is intended as a general guide and not as a comprehensive resource on the subjects covered. It is not a substitute for legal advice.

In 2015, the Texas Legislature passed House Bill 855, which requires state agencies to publish a list of the three most commonly used Web browsers on their websites. The Texas Comptroller’s most commonly used Web browsers are Microsoft Internet Explorer, Google Chrome and Apple Safari.

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