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Franchise Tax Overview
January 2014


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

The Texas franchise tax is imposed on each taxable entity formed in Texas or doing business in Texas. The tax is based on a taxable entity’s margin. Certain small businesses may be eligible to file a No Tax Due Report, and an EZ filing option is available for those with $10 million or less in annual total revenue.

Entities Subject to Tax

The Texas franchise tax is imposed on:

  • corporations;
  • limited liability companies (even if directly owned by one person);
  • partnerships (general, limited and limited liability);
  • business trusts;
  • professional associations;
  • business associations; or
  • other legal entities that are organized in Texas or that do business in Texas.

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

The tax is not imposed on the following:

  • sole proprietorships (except for single member limited liability companies filing as a sole proprietor for federal income tax purposes);
  • general partnerships where direct ownership is composed entirely of natural persons (except for limited liability partnerships);
  • entities exempt under Subchapter B of Chapter 171 in the Texas Tax Code;
  • certain unincorporated passive entities;
  • certain grantor trusts, estates of natural persons and escrows;
  • real estate mortgage investment conduits (REMICs) and certain real estate investment trusts (REITs); or
  • unincorporated political committees that are organized under the Election Code or the provisions of the Federal Election Campaign Act of 1971 (2 U.S.C. Section 431 et seq.). (Effective for reports originally due on or after Jan. 1, 2012.)

Calculation of the Tax

Margin

The tax base is the taxable entity's margin, except for entities that file the EZ Computation. Margin equals the least of four calculations based on eligibility:

  • total revenue minus cost of goods sold;
  • total revenue minus compensation;
  • 70 percent of total revenue; or
  • (for reports originally due on or after Jan. 1, 2014) total revenue minus $1 million.

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 Section 78 and Sections 951-964 of the Internal Revenue Code;
  • certain flow-through funds; and
  • other industry-specific exclusions.

See Rule 3.587 and the 2013 Legislative Update 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 Rule 3.588 and the 2013 Legislative Update 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) subject to the following inflation-adjusted, per person limitation per 12-month period upon which the tax is based:
    • $350,000 for report years 2014 and 2015;
    • $330,000 for report years 2012 and 2013;
    • $320,000 for report years 2010 and 2011;
    • $300,000 for report years 2008 and 2009; 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 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 Rule 3.591 and the 2013 Legislative Update for more information about apportionment.

Tax Rate

Report Year 2014

  • 0.975 percent for most taxable entities
  • 0.4875 percent for entities primarily engaged in retail or wholesale trade

Report Years 2008 - 2013

  • 1 percent for most taxable entities
  • 0.5 percent for entities primarily engaged in retail or wholesale trade

An entity is primarily engaged in retail or wholesale trade if the entity meets the criteria below:

  • total revenue from activities in retail and wholesale trade is greater than total revenue from activities in trades other than retail and wholesale trade;
  • less than 50 percent of total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and
  • the taxable entity does not sell retail or wholesale utilities, including telecommunications services, electricity or gas.

See Rule 3.584 for more information about retail and wholesale trade.

EZ Computation

A taxable entity with annualized total revenue of $10 million or less can elect to compute the franchise tax by multiplying total revenue by the apportionment factor and then multiplying the apportioned total revenue by a tax rate of 0.575 percent (.00575).

A taxable entity that elects to use the EZ computation cannot take any deductions from margin. It is not eligible for the cost of goods sold, the compensation the 70 percent of total revenue, or the $1 million deduction, and cannot claim any credits.

No Tax Due

Taxable entities with annualized total revenue below the no-tax-due threshold and taxable entities with tax due of less than $1,000 owe no franchise tax.

The no-tax-due threshold is:

  • $1,080,000 or less for franchise tax reports originally due on or after Jan. 1, 2014, and before Jan. 1, 2016;
  • $1,030,000 or less for franchise tax reports originally due on or after Jan. 1, 2012, and before Jan. 1, 2014;
  • $1,000,000 or less for franchise tax reports originally due on or after Jan. 1, 2010, and before Jan. 1, 2012;
  • $300,000 or less for franchise tax reports originally due on or after Jan. 1, 2008, and before Jan. 1, 2010.

All taxable entities, including those that owe no tax, must file a report. All taxable entities, except passive entities, must also file either a Public Information Report or an Ownership Information Report.

The law imposes a $50 penalty when a franchise tax report is filed late. The penalty will be assessed, even if no tax is due with that report and even if the taxpayer subsequently files the report.

Franchise Tax 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. An entity can file its franchise tax report, or request an extension of time to file, electronically.

Available Credits

  • Temporary Credit for Business Loss Carryforwards under Texas Tax Code Section171.111 (effective for reports originally due on or after Jan. 1, 2008).
  • Research and Development Activities Credit under Subchapter M of Texas Tax Code Chapter 171 (effective for reports originally due on or after Jan. 1, 2014).
  • Certified Historic Structures Rehabilitation Credit under Subchapter S of Texas Tax Code Chapter 171 (effective for reports originally due on or after Jan. 1, 2015).

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 Rule 3.590 for more information on combined reporting.

Questions?

If you have any questions about the franchise tax, please visit our website for information about the 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.

98-806
(03/2014)

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