What is Texas Franchise Tax and How Do You File for It?

Jul 6, 2023

What is Texas Franchise Tax and How Do You File for It?

When you run a corporation or business, there are a lot of different taxes and other payments you need to pay. It can be intimidating when you sit down and look at all these additional financial responsibilities. One of the payments you may need to pay, depending on the type of business you own and manage, is the Texas Franchise Tax. If you need to become more familiar with this, don’t worry; we will discuss it and briefly what you need to do.

Texas Franchise Tax – What is it?

Levied yearly by the Texas Comptroller, The Texas Franchise Tax applies to all taxable entities operating within the state. It is based on the margin, and it can be calculated in various ways. All businesses liable to pay this tax must file a report. The Franchise Tax Report is due on May 15 every year.

Who Should Pay the Franchise Tax?

Before you look at how to pay it and how to file it, you should make sure your company falls into the group of businesses that needs to pay Franchise Tax within the state of Texas.

If your business is any of the following, you should pay it:

  • Joint Ventures
  • Business Associations
  • Corporations
  • Series LLCs and LLCs
  • Professional Associations
  • Trusts
  • All types of partnerships
  • S-Corporations
  • Banks
  • Professional Corporations
  • Savings and Loan Associations 
  • State Limited Banking Associations
  • All other legal entities

What Entities Do Not Need to Pay Franchise Tax?

Your business is excluded from paying and filing a report for Franchise Tax if it falls into any of the following categories:

  • One natural person owns General Partnerships.
  • Sole Proprietorship (apart from Single Member LLCs)
  • Real Estate Mortgage Investment Conduits
  • Trusts Exempt Except Under IRS Code Section 501© (9)
  • Trusts Qualified Under IRS Code Section 401(a)
  • Unincorporated Political Committees
  • Non-Profit Self-Insurance Trust (Insurance Code Chapter 2212)
  • Certain Qualified Real Estate Investment Trusts
  • Certain Unincorporated Passive Entities
  • Entities Exempt Under Tax Code Chapter 171, Subchapter B

How is Franchise Tax Calculated?

Now you know whether your company is liable to pay Franchise Tax, it is time to discuss how it is calculated.

As noted earlier, Franchise Tax in the state of Texas is calculated based on the company’s margin and covers all entities with revenue of about the $1,230,000 mark. The threshold for the margin is subject to change every year.

There are various ways to calculate the margin, including:

Total revenue – $1m

Total Revenue – Compensation

Total Revenue – Cost of Goods Sold

Total Revenue x 70%

How Total Revenue is Calculated

The total revenue is calculated by subtracting all statutory exclusions from the total revenue reported for the company’s federal income tax.

The most common statutory exclusions include:

  • Certain Flow-Through Funds
  • Foreign Royalties and dividends (IRS Code Sections 78 and 951-964)
  • Schedule C Dividends
  • Dividends and Interests from Federal Obligations
  • Other Exclusions Specific to Industries

Filing for Franchise Tax

If your company is liable, there are three ways you can file a Franchise Tax Report, including:

  • Long Form
  • EZ Computation
  • No Tax Due

If the revenue limit of $1,230,000 has not been met, you do not need to pay. If it is above, you can either give yourself some time and file the Long or EZ Computation Form.

At BSH Accounting, we file this Texas Franchise tax report yearly for our tax clients.

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