The Texas Franchise Tax on Corporations
(Applies to reports originally due before January 1, 2008)
Corporations with a Texas charter and non-Texas corporations doing business in Texas must file a Texas franchise tax return.
The Franchise Tax
The franchise tax is imposed on each corporation that is chartered in Texas and each non-Texas corporation that does business in Texas. See Franchise Tax Rule 3.546 for a list of some activities considered to be “doing business in Texas.”
For franchise tax purposes, the term “corporation” also includes a bank, state limited banking association, savings and loan association, limited liability company, professional limited liability company, a corporation that elects to be an S corporation for federal income tax purposes, and a professional corporation. Professional associations and partnerships are not subject to the franchise tax.
How the Tax Is Computed
Corporations pay the greater of the tax on net taxable capital or net taxable earned surplus.
Taxable capital is a corporation's stated capital (capital stock) plus surplus. Surplus means the net assets of a corporation minus its stated capital. For a limited liability company, surplus means the net assets of the company minus its members' contributions. For more details on surplus, see Rule 3.551. Taxable capital is apportioned using a single gross receipts factor.
The tax rate on taxable capital is 0.25 percent per year of privilege period. For an explanation of “privilege period,” see Tax Code Sec. 171.151.
Earned surplus basically includes the corporation's federal net taxable income, plus compensation paid to officers and directors of the corporation. S corporations and corporations with fewer than 36 shareholders are generally exempt from the compensation add-back. For the earned surplus calculation, unitary income is apportioned using a single gross receipts factor. Non-unitary income (with the exception of dividends and interest) is allocated to Texas if Texas is the corporation's commercial domicile. For more information on the allocation of non-unitary income, see Rule 3.576.
Note: Dividends and interest are apportioned to the legal domicile of the payor.
The tax rate on earned surplus is 4.5 percent. For more information on the computation of earned surplus, see Rule 3.555.
No Minimum Tax
Corporations that owe less than $100 do not pay any tax. In addition, for reports due on or after January 1, 2000, corporations will not owe any tax if the gross receipts from their entire business for both taxable capital and taxable earned surplus are each less than $150,000 during the period upon which the tax is based. These corporations must file an abbreviated information report.
The initial report is due 89 days after the first anniversary of the charter date of a Texas corporation. For a non- Texas corporation, the due date is 89 days after the first anniversary of the date the corporation began doing business in Texas.
Taxable capital for an initial report is based on the corporation's last accounting period ending date that is at least six months after its beginning date and at least 60 days before the due date of the initial report. If the corporation's normal accounting year end does not meet the above criteria, the corporation must use the end of the month that is closest to the first anniversary of its beginning date.
Earned surplus for an initial report must be reported beginning with the date the corporation began doing business in Texas and ending with the corporation's last accounting period ending date for federal income tax purposes that is at least 60 days before the due date of the initial report.
A preprinted report with a prorated tax rate for taxable capital will be mailed to the corporation's address on file with the Comptroller's office about two months before the report is due. A franchise tax report must be signed by an officer, director, or any other person authorized by the corporation. Blank initial reports are available on-line at <www.window.state.tx.us>.
After the initial report is filed, the corporation will file an annual report each May 15. Preprinted report forms are mailed to the corporation's address on file with the Comptroller's office at least a month before the report is due. A franchise tax report must be signed by an officer, director, or any other person authorized by the corporation. Blank annual reports are available on-line at <www.window.state.tx.us>.
Taxable capital for an annual report is based on the end of the corporation's last accounting period in the calendar year prior to the calendar year in which the report is due.
Earned surplus for an annual report must be reported beginning with the day after the ending date on the previous franchise tax report and ending with the corporation's last accounting period ending date for federal income tax purposes in the calendar year prior to the calendar year in which the report is due.
Failure to receive a preprinted report form does not relieve the corporation from the responsibility for filing the report.
Public Information Report
The Public Information Report (PDF, 93KB) is a listing of the officers and directors of the corporation. It also contains information about owned and owning corporations or limited liability companies related to the reporting entity. Public Information Reports must be filed with the initial and annual franchise tax reports. An officer, director, or other authorized person must sign the Public Information Report.
Public Information Reports are forwarded to the Secretary of State as required by law. The Public Information Report is intended to reflect the officers and directors of the reporting corporation as of the date the report was filed. If a person's name is included on the Public Information Report and the person was not an officer or director of the corporation on the date the report was filed, the person may file a sworn (notarized) statement to this effect with the Comptroller.
Penalties for Failure to File a Franchise Tax Report
Penalty and any applicable interest will be assessed on delinquent taxes. If a franchise tax report is not filed by the due date, a 5.0 percent penalty is imposed on the amount of franchise tax due. If any part of the tax is not reported or paid within 30 days after the due date, an additional 5.0 percent penalty is imposed on the amount of unpaid tax.
Delinquent taxes accrue interest beginning 60 days after the due date. For example, if payment is made on the 61st day after the due date, one day's interest is due. For taxes due on or after January 1, 2000, the interest rate varies annually. Additional information regarding interest rates and how to compute interest is available on our website at: <http://window.state.tx.us/taxinfo/int_rate.html>.
The Comptroller may estimate the tax due and send a jeopardy determination to the corporation if a franchise tax report is not filed by the due date. The jeopardy determination becomes final in 20 days. If the jeopardy becomes final without payment, the Comptroller will assess an additional 10 percent determination penalty and may file liens, freeze bank accounts, seize assets or certify the account to the Texas Attorney General for collection. Payment of the estimate alone will not satisfy franchise tax requirements; all required reports, including the Public Information Report, must be filed.
A corporation may have its corporate privileges in Texas forfeited for failure to file a report, including the Public Information Report, or pay the tax within 90 days after the due date. The forfeiture bars the corporation from using the corporate name to sue or defend in court and exposes the officers and directors to personal liability. The personal liability is for all debts of the corporation, including taxes, that were incurred in Texas after the due date of the delinquent report, unless the officer or director objected to the creation of, or could not have known about the creation of, the debt.
If the corporate privileges have been forfeited and franchise taxes have not been paid within 120 days after the date the privileges were forfeited, the charter or Certificate of Authority may be forfeited by the Secretary of State or in a court proceeding brought by the Attorney General.
The Comptroller will not issue a Certificate of Account Status, attesting to a corporation's “good standing” if the corporation has not filed reports and paid franchise taxes due the state. In many private financial transactions, a corporation must produce such a certificate.
Note: All franchise tax report forms can be located and downloaded from our website at <http://window.state.tx.us/taxinfo/taxforms/05-forms.html>.