The Texas Franchise Tax has long been a distraction for executives and business owners in the period following the federal tax season and it has indeed been sorely in need of overhaul.  In May of 2007, the Legislature of the State of Texas made substantial changes in the Texas Franchise Tax. The selling point for this change was the consideration that the property tax rates would be lessened as more of the tax burden shifted to businesses. Although the property tax rate decrease has not effectively materialized, the State Legislature cast a wide net over the business community, subjecting many entity types not previously taxed to its authority. The greatest of these changes address the tax base upon which the tax is calculated, the tax rate, and the additional of many new taxable entities.

The business owner or taxpayer should keep in mind that terms such as Total Revenue, Cost of Goods Sold, Wages and Cash Compensation, and Employee Benefits may have a distinctly different meaning in the Texas Tax Code than that applied by the Internal Revenue Service. Please take the opportunity to explore our links to obtain the applicable definition under Texas Tax Law.

The Tax Base. Many of those familiar with Franchise Tax in Texas remember that the tax base that has been in effect for so many years utilized the state’s definition of Taxable Capital and Earned Surplus. The current changes in the base upon which the Franchise Tax is calculated is an entity’s margin. Due to the “margin” term, many refer to the new Franchise Tax as the Margin Tax. It is the defining of that margin, however, that often leaves business owners and their accountants confused. At Clay Thomas P.C., we are qualified to take the confusion and the burden of Franchise Tax reporting from our clients so that they can focus on operational matters.

In the new Texas Tax Code, there are two ways of deriving the margin. An organization may subtract its Cost of Goods Sold from its Total Revenue or it may subtract Total Wages and Cash Compensation plus Employee Benefits from its Total Revenue.  There is a requirement that the selection of a method must last the full year. Generally, service companies are limited to the Wage Method since they do not usually have Cost of Goods Sold and do not produce or sell tangible personal property or real property.

Taxable Entities

Non-Taxable Entities

New Texas Franchise (Margin) Tax Rates:

• 1% for most entities
• .5% for entities engaged primarily in retail and wholesale trades. Retail trade is defined as those activities described in Division G and Wholesale Trade is defined by activities described in Division F of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget. www.osha.gov/pls/imis/sic_manual.html
• .575% for entities with $10 million or less in Total Revenue (annualized per 12 month period upon which the report is based) electing the E-Z computation.

Taxable entities with Total Revenue (annualized per 12 month period upon which the report is based) of $300,000 or less will owe no tax.

Taxable entities tax due of less than $1,000 will owe no tax.

All taxable entities, including those which owe no tax, must file a report.