What is a franchise tax in Texas?

Definition of Franchise Tax in Texas

The Texas franchise tax is a privilege tax imposed on each taxable entity that is formed or organized in Texas or doing business in Texas. This includes entities such as limited liability companies (LLCs), corporations, partnerships, and other legal entities. Certain entities are exempt from the franchise tax, including sole proprietorships, general partnerships owned solely by natural persons, and entities exempt under specific Tax Code chapters.

Calculation of Franchise Tax

The franchise tax is based on a taxable entity's margin, which can be computed in one of the following ways:

1. Total revenue times 70 percent.

2. Total revenue minus cost of goods sold (COGS).

3. Total revenue minus compensation.

4. Total revenue minus $1 million (effective Jan. 1, 2014).

Total revenue is determined from federal income tax reporting, with specific statutory exclusions. The margin is then apportioned to Texas using a single-factor formula based on gross receipts.

Key Points for Franchise Tax Reporting and Payment

- The annual franchise tax report is due on May 15. If this date falls on a weekend or holiday, the due date is the next business day.

- The no tax due threshold for reports due in 2024 is increased to $2.47 million.

- Tax rates, thresholds, and deduction limits vary by report year and must correspond to the year for which you are filing.

- Entities with total revenue below the no tax due threshold are no longer required to file a No Tax Due Report but must continue to file an information report each year.

- A $50 penalty is assessed for each report filed after the due date, with additional penalties and interest for late tax payments.

- Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report.

Entities should ensure they are using the correct forms and following the updated guidelines for the report year they are filing. It is important to adhere to the deadlines and requirements to avoid penalties and maintain the right to conduct business in Texas.

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Sources:

Franchise Tax - Texas Comptroller of Public Accounts 2024-08-03

Franchise Tax Overview - Texas Comptroller of Public Accounts 2024-08-03

Sales and Use Tax - Texas Comptroller of Public Accounts 2024-08-04

Remote Sellers - Texas Comptroller of Public Accounts 2024-08-03

File and Pay - Texas Comptroller of Public Accounts 2024-08-03

Texas Franchise Tax Forms - Texas Comptroller of Public Accounts 2024-08-02

Requirements for Reporting and Paying Franchise Tax Electronically 2024-08-03

Franchise Tax Account Status - Texas Comptroller of Public Accounts 2024-08-04

Franchise Tax Frequently Asked Questions - Texas Comptroller of Public ... 2024-08-02

05-913 - 2024 Franchise Tax Instructions - Texas Comptroller of Public ... 2024-08-04