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August 2009

By Clint Shields

A Sense of Relief

Tax change eases burden on some Texas businesses.

New legislation will grant tax relief to thousands of small businesses in Texas.

The 2007 Texas Legislature crafted a new franchise tax law that not only expanded the types of businesses required to pay the tax, but also required existing taxpayers to learn a new method for calculating their liability. The revised tax, often called the “margins tax,” is generally based on the difference between a business’s total revenue and either its cost to produce goods sold or its compensation expenses (but not both). The changes were made in response to anticipated increases in state educational spending, the result of local school property tax relief passed in the same year.

This year, the Legislature revised the tax again, to ease the financial and paperwork burden it placed on many smaller businesses. The new law more than triples the small-business franchise tax exemption, from $300,000 in total annual revenues to $1 million. This will exempt more than 130,000 Texas businesses from the tax, including almost 40,000 that had to pay the tax in 2008 and 2009.

“This relief gives the state’s leading employment sector, small business, an opportunity for savings in these tough economic times,” says State Rep. Rene Oliveira, the bill’s author and chairman of the House Ways and Means Committee.

Keeping Your Shirt

Texas’ strong reputation for business-friendliness recently earned it the top spot in Directorship magazine’s “Best States for Business” list. The franchise tax change should help further the state’s reputation, particularly among small businesses trying to gain footholds in today’s economy.

Charting Collections

A slowing economy has kept franchise tax collections from reaching the levels the tax change was initially expected to yield.

(in billions)

* Last year before tax change
** Projected collections

Source: Texas Comptroller of Public Accounts

“If you look at small business in Texas, this is a huge break for [them],” says Dave Vinyard, owner of Briscoe Hall, a Kerrville-based advertising agency.

Even on a fast-tracked plan of 15 to 18 months until profitability, a new business still will operate in the red for almost two years, Vinyard says. Under the old plan, the $300,000 revenue exemption would make it extremely difficult to survive, he says.

“Let’s say you do between $300,000 and $500,000 [annually] in the first two years. That tax still causes you to lose your shirt,” says Vinyard.

Vinyard has been a vocal proponent of the change, even though his own business’s revenue will exceed $1 million this year. He says it gives owners and employees alike a chance to succeed, which is what they need. “This gives small businesses an even shot at coming out of this recession and surviving,” he says. FN

Check out more information on the Texas franchise tax.

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