Franchise Tax Overview
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 an entity's taxable 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 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 and 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;
- 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); and/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.)
The tax base is the taxable entity's margin. Margin should equal the least of three calculations based on eligibility:
- total revenue minus cost of goods sold;
- total revenue minus compensation; or
- 70 percent of total revenue.
Total revenue is determined based on 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;
- for health care providers, revenues from Medicaid, Medicare, Children's Health Insurance Program (CHIP), workers' compensation claims, TRICARE and actual costs of uncompensated care; and
- for health care institutions, 50 percent of revenues from Medicaid, Medicare, CHIP, workers' compensation claims, TRICARE and actual costs for uncompensated care.
See Rule 3.587 for more information about total revenue.
Cost of Goods Sold
Statutorily defined cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and real property. There are other costs of goods sold allowances for certain industries. Taxable entities that only sell services will generally not have a cost of goods sold deduction.
See Rule 3.588 for more information about cost of goods sold.
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: $300,000 for report years 2008 and 2009, $320,000 for report years 2010 and 2011, and $330,000 for reports 2012 and 2013; 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.
Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts. There are no throwback provisions.
See Rule 3.591 for more information about apportionment.
The tax rate is 1 percent for most taxable entities. For entities meeting the following criteria, the tax rate is 0.5 percent:
- the entity is primarily engaged in the retail or wholesale trade under division F or G of the 1987 Standard Industrial Classification (SIC) Manual. Effective for reports originally due on or after Jan. 1, 2012, retail trade includes apparel rental activities classified as industry 5999 or industry 7299 of the 1987 SIC Manual;
- the total revenue from activities in retail and wholesale trade is greater than the total revenue from activities in trades other than the retail and wholesale trade;
- less than 50 percent of the 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.
A taxable entity with annualized total revenue of $10 million or less may 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 is not eligible for the cost of goods sold or the compensation deduction and may not claim any credits.
No Tax Due
Taxable entities with annualized total revenue that is below the no-tax-due threshold and taxable entities with tax due of less than $1,000 owe no tax.
The no-tax-due threshold is as follows:
- $300,000 or less for franchise tax reports originally due on or after Jan. 1, 2008, and before Jan. 1, 2010.
- $1,000,000 or less for franchise tax reports originally due on or after Jan.1, 2010, and before Jan. 1, 2012.
- $1,030,000 or less for franchise tax reports originally due on or after Jan. 1, 2012, and before Jan. 1, 2014.
- $600,000 or less for franchise tax reports originally due on or after Jan. 1, 2014.
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.
A taxable entity, after computing the tax due on its taxable margin, is entitled to a discount on the tax imposed if its annualized total revenue before apportionment is less than $900,000. These discounts are not applicable to report years 2010 through 2013 because the no tax due threshold in these years is greater than the $900,000 discount threshold.
Temporary Credit for Business Loss Carryforwards
A corporation or a limited liability company that was subject to the franchise tax on May 1, 2006, and preserved its right to take the temporary credit for business loss carryforwards on or before the due date of its 2008 report, is eligible to take a credit based on the following calculation schedule:
- for report years 2008-2017: 2.25 percent x 4.5 percent x preserved amount of business loss carryforwards as of Jan. 1, 2008
- for report years 2018-2027: 7.75 percent x 4.5 percent x preserved amount of business loss carryforwards as of Jan. 1, 2008
See Rule 3.594 for more information on the temporary credit.
See Rule 3.590 for more information on combined reporting.