Texas Franchise Tax
Margin, Discounts, Temporary Credit for Business Loss Carryforwards, and Combined Reporting
The revised tax base is the taxable entity’s margin. Margin equals the lesser of three calculations:
- Total revenue minus cost of goods sold;
- Total revenue minus compensation; or
- Total revenue times 70 percent.
Total revenue is determined based on revenue amounts reported for federal income tax minus statutory exclusions from revenue.
Exclusions from revenue include:
- dividends and interest from federal obligations, Schedule C dividends, foreign royalties and dividends under Section 78 and Sections 951-964;
- certain flow-through funds;
- health care providers may exclude revenues from Medicaid, Medicare, Children’s Health Insurance Program (CHIP), workers’ compensation claims and TRICARE, and actual costs for uncompensated care; and
- health care institutions exclude 50 percent of revenues from Medicaid, Medicare, CHIP, workers’ compensation claims and TRICARE, and actual costs for uncompensated care.
Cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and up to 4 percent of administrative and overhead costs. There are other cost of goods sold allowances for certain industries. In all cases, officer compensation and payments made to undocumented workers are specifically excluded from cost of goods sold.
Taxable entities only selling services will generally not have a cost of goods sold deduction.
Compensation and benefits include:
- W-2 wages and cash compensation paid to officers, directors, owners, partners and employees (including owner or partner distributions to natural persons), limited to $300,000 per person; 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.
Payments for undocumented workers are not deductible as compensation.
Margin is apportioned to Texas in essentially the same manner as prescribed by current law.
A taxable entity is entitled to a discount of the tax imposed as follows:
- If Total Revenue is greater than $300,000 and less than $400,000, the discount is 80 percent of tax due.
- If Total Revenue is greater than or equal to $400,000 and less than $500,000, the discount is 60 percent of tax due.
- If Total Revenue is greater than or equal to $500,000 and less than $700,000, the discount is 40 percent of tax due.
- If Total Revenue is greater than or equal to $700,000 and less than $900,000, the discount is 20 percent of tax due.
Corporations and limited liability companies that were doing business in Texas on May 1, 2006, are eligible to take a credit based on business loss carryforwards that were not exhausted on a report originally due before January 1, 2008.
These entities will preserve their right to take this credit on a form prescribed by the Comptroller on or before May 15, 2008. These entities may elect to take the credit on any report originally due on or after January 1, 2008.
The credit calculation is:
- Report Years 2008-2017: (unexhausted business loss carryforwards as of 01/01/08) x 2.25% x 4.5%
- Report Years 2018-2027: (unexhausted business loss carryforwards as of 01/01/08) x 7.75% x 4.5%
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.
A combined group may preserve and elect to take the temporary credit for business loss carryforwards for members of the combined group. However, if a member leaves the combined group, that portion of the credit will be disallowed on future reports.