In the last few weeks, most business owners have been racing to get their federal tax returns extended or filed by the April deadline. It’s easy to forget there is another tax deadline quickly approaching – Texas Franchise tax returns are due on May 15th. An extension may be filed, but tax due (lower of 90% of current year tax or 100% of prior year tax) must be paid by the May 15 deadline.
Calculations for the Texas Franchise tax returns due in 2017 look very similar to last year’s calculations because Texas Legislators were not in session during 2016. Even though these tax calculations have not changed much, there still are a few things to keep in mind.
No Tax Due Threshold
Businesses that have gross receipts less than a certain threshold are exempt from paying Texas Franchise Tax. The No Tax Due threshold is $1,110,000 for returns originally due on or after January 1, 2016 and before January 1, 2018. Be sure to note, even if your business falls below this threshold, you still have to file a Texas Franchise tax return.
Texas Deductions Aren’t the Same as Federal
There are a variety of ways to calculate your lowest taxable margin for franchise tax purposes. The two simplest methods are Total Revenue times 70%, or Total Revenue minus $1 million; however, these may not result in the lowest amount of tax for you. If applicable, businesses can alternatively offset revenue by taking a deduction for either Cost of Goods Sold or Compensation (both have specific rules that apply). Since Texas does not allow you to offset your income with all of your federal deductions, it is possible to owe Texas Franchise tax while having a loss for federal tax purposes.
Exemption for Veteran-Owned Business
Senate Bill 1049, signed into law on June 4, 2015, exempts qualified veteran-owned business from the Texas franchise tax until the fifth anniversary of the date on which the entity began to conduct business.
To be considered a new veteran-owned business, an entity must meet all of the following qualifications:
- The business must be an entity organized in Texas on or after January 1, 2016 and before January 1, 2020;
- It must be wholly owned by a natural person (or persons), each of whom was honorably discharged from a branch of the United States armed services; and
- The business must provide a letter from the Texas Veterans Commission verifying the honorable discharge of each owner.
The required documentation must be filed along with Form 05-904 – Certification of New Veteran-Owned Business either with the Texas Secretary of State or the Texas Comptroller, depending on the type of business entity.
The veteran-owned business must still file a No Tax Due Franchise Tax return.
Public Information and Ownership Reports
There is an additional report that must be filed with the franchise tax return. Corporations, LLCs, limited partnerships, professional associations, and financial institutions are required to file a Public Information Report. Any other entity not listed above is required to file an Ownership Information Report. These reports list the owners/directors of the business and the address where those folks can be contacted. If you need to pull these forms or their instructions you can visit the Comptroller’s website at https://comptroller.texas.gov.
Sometimes a group of businesses, called an affiliate group, are required to file a combined Texas Franchise tax return. An affiliate group is typically comprised of businesses with common owners that are engaged in a unitary business. A common owner is an owner(s) who own 50% or more of the business interest. In general, a unitary business is defined as a single economic enterprise that may be made up of entities in similar industries or that merely do business together.
This information is just a short list of considerations to help you start thinking about your Texas Franchise tax return. Be sure to consult your tax advisor on your unique situation to adequately plan. As always please let us know if we can help in any way!
By: Diane White