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Franchise Tax
Frequently Asked Questions


Taxable Entities

Rule 3.581

  1. What entities are subject to the franchise tax?
  2. What entities are not subject to the revised franchise tax?
  3. Is a general partnership whose partners consist of natural persons a taxable entity?
  4. Is a general partnership owned directly and entirely by natural persons that elects limited liability status a taxable entity?
  5. Is a general partnership whose partners consists of natural persons and one general partnership a taxable entity?
  6. Will an estate of a deceased partner involved in a general partnership make a general partnership made up of natural persons subject to franchise tax?
  7. Is a limited partnership whose partners consist of natural persons a taxable entity?
  8. Are family limited partnerships subject to the franchise tax?
  9. Are sole proprietorships subject to the franchise tax?
  10. What is a natural person?
  11. Are passive entities taxable entities?
  12. Is a non-Texas entity that owns a royalty interest in an oil or gas well in Texas subject to the franchise tax?
  13. The taxpayer is a disregarded entity for federal purposes. Do they have to file franchise tax if they have nexus in Texas?
  14. Is a limited liability company that was set up to collect lottery winnings subject to the franchise tax?
  15. Are trusts subject to the franchise tax?
  16. Is a joint venture wholly owned by natural persons a taxable entity?
  17. Is a partnership with an IRA as a partner a taxable entity?
  18. Are grantor trusts subject to the franchise tax?
  19. How does a series limited liability company (series LLC) report its activities for franchise tax?

Passive Entities

Rule 3.582

Exemptions

Rule 3.583

Reports and Payments

Rule 3.584

  1. What is franchise tax?
  2. Do all entities have to file franchise tax reports?
  3. What is the revised franchise tax base?
  4. In regards to qualifying for the 0.5% tax rate, what does “primarily engaged in wholesale or retail trade” mean?
  5. How is retail trade defined?
  6. How is wholesale trade defined?
  7. Where can taxpayers find their SIC code and why is it required on the forms?
  8. What is a NAICS code and why is it required on the forms?
  9. What does an entity file if it is ending its existence or no longer has nexus?
  10. What accounting period ending date was used for filing the initial franchise tax report?
  11. How does a taxable entity make an election for cost of goods sold or compensation?
  12. If tax due is more than $1,000, but annualized total revenue is less than the no-tax-due threshold amount, do I owe the tax?
  13. What is the E-Z Computation and who is eligible for it?
  14. What is the discount from tax liability?
  15. Is the discount percentage based on apportioned revenue?
  16. What are the criteria for filing no-tax-due reports?
  17. Are quarterly estimated payments required?
  18. Do I need to send a copy of my federal return?
  19. If the accounting period on my franchise tax report is not 12 months, how do I annualize total revenue to determine my eligibility for the no-tax-due threshold, discounts on tax due that are based on total revenue and qualification for the E-Z computation?
  20. Is the information I report on the Ownership Information Report public information?
  21. What if entities filed separate reports and later determine they should have filed a combined report?
  22. Which entities file the Public Information Report, Form 05-102, and which entities file the Ownership Information Report, form 05-167?
  23. How do I complete Section A on form 05-167 Ownership Information Report if I do not have members or limited or general partners?
  24. When reporting individuals on the form 05-167 Ownership Information Report do I report the social security number if they do not have a FEI number?
  25. May I leave the registered agent’s information blank if I do not have one?
  26. When can I amend my franchise tax report?
  27. When is a newly taxable entity's first report due?
  28. What happens if my business closes down in its first year?
  29. What if the entity's normal accounting year end date is prior to the date it became responsible for franchise tax?
  30. For 2014 and 2015 franchise tax reports, what is the effect of the increase in the Consumer Price Index (CPI) on the calculation of the no-tax-due threshold amount, discounts, and the compensation deduction?
  31. What's the best way to make a payment on the due date?
  32. How much is the No-Tax-Due Threshold Amount?

Extensions

Rule 3.585

Total Revenue

Rule 3.587

  1. Is the calculation of total revenue the same as federal income?
  2. What are some examples of flow-through funds mandated by contract that can be excluded from total revenue?
  3. Do attorneys have exclusions from total revenue?
  4. Are real estate gains taxable?
  5. If a health care provider excludes from total revenue the actual cost of uncompensated care, must the health care provider decrease its cost of goods sold or compensation deduction by the costs excluded from total revenue?
  6. If a health care provider excludes from total revenue payments received under the Medicaid, Medicare and other programs specified in Tax Code §171.1011(n), must the health care provider make a corresponding adjustment to its cost of goods sold or compensation deduction?
  7. Are co-payments and deductibles received from individuals under the Medicaid, Medicare and other programs specified in Tax Code §171.1011(n) excluded from total revenue?
  8. What is "annualized revenue?"
  9. 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?
  10. Can a bank reduce total revenue by the amount of principal repayment taken as a bad debt?
  11. How is the revenue exclusion for the Cost of Uncompensated Care determined?
  12. Are co-payments and deductibles received from supplemental insurance for patients under the Medicare, Medicaid and other programs specified in TTC 171.1011(n) excluded from total revenue?
  13. Can a staff leasing services company or temporary employment service company deduct 1099 labor from total revenue?
  14. When can an attorney take the $500 pro bono services case exclusion from total revenue?
  15. Are capitation awards excluded from total revenue?
  16. How do we treat negative Net Distributive Income (NDI) when computing total revenue?
  17. How do I determine if I am a "Health Care Provider" or "Health Care Institution?"
  18. How does a homeowners association that is not exempt from franchise tax compute total revenue for franchise tax reporting purposes?
  19. Can a travel agent exclude from total revenue the funds collected from a customer for items such as an airline ticket?
  20. 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?
  21. Is the federal election for deferral of Cancellation of Debt income, which became effective January 1, 2009, disregarded for Texas franchise tax purposes, or can a taxpayer use the numbers actually reported on the line items of the federal return which take into account this deferral?
  22. How do line number changes the IRS makes to federal forms affect the calculation of total revenue?
  23. Where can a taxpayer find information about the Comptroller's certification of oil and gas prices?
  24. What is a low-producing well for purposes of the oil and gas revenue exclusion?
  25. Why are some of the line numbers that specify total revenue in the statute and in franchise tax rule 3.587 different from those shown on the current IRS forms?

Cost of Goods Sold (COGS)

Rule 3.588

  1. What is the definition of "goods?"
  2. Are service industries such as a transportation company allowed COGS?
  3. Is the calculation for COGS like the federal reporting and industry calculations?
  4. What costs are included in the computation of COGS?
  5. What costs are not allowed in the computation of COGS?
  6. Can IRS Form 1099-MISC nonemployee compensation be included in the computation of COGS?
  7. Can flow-through funds excluded from gross revenue be included in the computation of COGS?
  8. Are a contractor's payments to subcontractors included in the computation of COGS?
  9. Is a store stocker providing labor included in COGS?
  10. Is the labor provided by cooking staff and wait staff in a restaurant included in COGS?
  11. When must the election for COGS be made and once made, can it be changed?
  12. Is there a difference between expensing and capitalizing allowable costs for the computation of COGS?
  13. If an entity elects to capitalize allowable costs for COGS, is it required to capitalize all allowable costs?
  14. Can an entity use its beginning inventory for federal income tax purposes if the entity capitalizes allowable costs for COGS?
  15. Can an entity switch from capitalizing allowable costs for COGS to expensing allowable costs for COGS?
  16. Can an entity switch from expensing to capitalizing allowable costs for COGS?
  17. Are entities that drill for oil & gas allowed a cost of goods sold deduction?
  18. How are Section 179 expense limitations and federal bonus depreciation amounts determined for Texas COGS?
  19. Do movie theaters qualify for cost of goods sold?
  20. What is a "mixed transaction" and does it qualify for a cost of goods sold deduction?
  21. Do oil and gas wells constitute real property for purposes of TTC 171.1012(i)?
  22. Can oilfield services that an entity performs be included in COGS?
  23. Can the labor to install tangible personal property be included in COGS?
  24. What is the amount of Section 179 expense deduction that can be included in COGS?
  25. Are the compensation and benefits of a salesperson included in COGS?
  26. Can a motor vehicle sales finance company deduct interest expense as a cost of goods sold?
  27. Can a limited partnership elect to amortize intangible drilling costs over 60 months instead of expensing these costs?
  28. Can a partnership or S corporation include depletion in COGS?

Compensation

Rule 3.589

  1. When must the election for Compensation be made and once made, can it be changed?
  2. Is the calculation for compensation like the federal reporting and industry calculations?
  3. What is included in computing compensation?
  4. Is net distributive income included in compensation?
  5. Is a single member LLC treated as a sole proprietorship for federal tax allowed to include in compensation the compensation of the single member?
  6. What is included in compensation for an S Corporation with two shareholders/employees that pays a salary of $50,000 to each of the employees and reports on the K-1s to the shareholders/employees $100,000 in income?
  7. In computing compensation does the net distributive income have to be distributed?
  8. Is the employer's share of payroll taxes included in compensation?
  9. Can Internal Revenue Service (IRS) Form 1099-MISC nonemployee compensation be included in compensation?
  10. What is the net distributive income for computing compensation and how is it computed?
  11. If net distributive income (NDI) is negative, does it have to be included in compensation?
  12. How does the wage limitation for the wages and cash compensation component apply when W-2 wages and a K-1 are issued to the same person?
  13. If the accounting period on my report is less than 12 months, can I still deduct the full amount of the wage limitation in wages per person?
  14. Can a partnership include in the compensation deduction for franchise tax purposes the costs of tax qualified defined contribution and defined benefit retirement plans as well as health care costs (“benefit costs”) that are deductible for federal income tax purposes on the individual partners' returns under the following two scenarios?

Combined Reporting

Rule 3.590

  1. What entities must be included in the combined group that files a combined report?
  2. What types of entities are included in a combined group?
  3. What type of entities cannot be included in a combined group?
  4. Can a passive entity be part of a combined group?
  5. What is an affiliated group?
  6. What does unitary business mean?
  7. What factors are considered in determining a unitary business?
  8. When filing a combined report, should the reporting entity include entities in which there is part ownership, but not more than 50%?
  9. In determining a combined group, is there attribution of ownership between family members?
  10. Does a combined group include entities meeting the ownership and unitary criteria if the entity does not have nexus in Texas?
  11. Does the no-tax-due threshold apply to the individual members of the combined group or the combined group as a whole?
  12. If members of a combined group qualify for different tax rates, how is the tax rate determined for a combined group?
  13. How does the reporting entity of a combined group determine an appropriate SIC Code for the group if its members have different SIC codes?
  14. Is a combined group eligible to use the 70% of revenue calculation?
  15. Is a combined group eligible for the discount, E-Z computation or No Tax Due report?
  16. Who is responsible for filing the reports and remitting payments for combined reports?
  17. How does a combined group determine its accounting period?
  18. How does a combined group handle members with a different accounting period?
  19. How will adding members with no Texas receipts affect the calculations?
  20. If an entity is acquired by a combined group, is the entity required to file a short period franchise tax report?
  21. Is a combined group required to file initial or final franchise tax reports?
  22. If an entity is a member of a combined group, will it be required to file a separate first annual franchise tax report?
  23. If an entity is a member of a combined group, will it be required to file a final franchise tax report?
  24. 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?

Apportionment

Rule 3.591

Credits

Rules 3.593 and 3.594

Notice to Reporting Entity of a Combined Report Group

Staff Leasing Companies

Tiered Partnership Provisions

Transition Questions and Answers

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