Houston Texas Franchise Tax
At first glance, franchise tax might sound like something you have to pay if you were to own a Dunkin Donuts or a 7-Eleven. However, it doesn’t mean franchise in terms of a business model where you have a franchisee and a franchisor.
A franchise tax is a government levy (tax) charged by some US states to certain business organizations such as corporations and partnerships with a nexus in the state. A franchise tax is not based on income. Rather, the typical franchise tax calculation is based on the net worth of or capital held by the entity.
Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:
limited liability companies (LLCs), including series LLCs;
state limited banking associations;
savings and loan associations;
partnerships (general, limited and limited liability);
joint ventures; and
other legal entities.
See Franchise Tax Rule 3.586 for a list of some activities considered to be “doing business in Texas.”
Entities Not Subject to Franchise Tax
The following entities do not file or pay franchise tax:
sole proprietorships (except for single member LLCs);
general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships);
entities exempt under Tax Code Chapter 171, Subchapter B;
certain unincorporated passive entities;
certain grantor trusts, estates of natural persons and escrows;
real estate mortgage investment conduits and certain qualified real estate investment trusts;
a nonprofit self-insurance trust created under Insurance Code Chapter 2212;
a trust qualified under Internal Revenue Code Section 401(a);
a trust exempt under Internal Revenue Code Section 501(c)(9); or
unincorporated political committees.
Calculation of the Tax
Franchise tax is based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways:
total revenue times 70 percent;
total revenue minus cost of goods sold (COGS);
total revenue minus compensation; or
total revenue minus $1 million (effective Jan. 1, 2014).
Total revenue is determined from 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 Internal Revenue Code Section 78 and Sections 951-964;
certain flow-through funds; and
other industry-specific exclusions.
See Tax Code Section 171.1011 and Rule 3.587 for more information about total revenue.
Cost of Goods Sold
Cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and real property. There are other cost of goods sold allowances for certain industries. Taxable entities that only sell services will not generally have a cost of goods sold deduction.
See Tax Code Section 171.1012 and 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) for the 12-month period upon which the tax is based, subject to the inflation-adjusted per person compensation limitation; 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 Tax Code Section 171.1013 and Rule 3.589 for more information about compensation.
Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts.
See Tax Code Section 171.106 and Rule 3.591 for more information about apportionment.
The following franchise tax credits are available:
Temporary Credit for Business Loss Carryforwards under Texas Tax Code Section 171.111 (effective for reports originally due on or after Jan. 1, 2008)
Research and Development Activities Credit under Texas Tax Code Chapter 171, Subchapter M (effective for reports originally due on or after Jan. 1, 2014)
Certified Historic Structures Rehabilitation Credit under Texas Tax Code Chapter 171, Subchapter S (effective for reports originally due on or after Jan. 1, 2015)
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.
See Tax Code Section 171.1014 and Rule 3.590 for more information on combined reporting.
Franchise Tax Returns and Information Reports
Each taxable entity must file a Franchise Tax Report (No Tax Due, EZ Computation or Long Form) and an Information Report (Public Information Report or Ownership Information Report). See Which Form Should I File? to learn more about these different reporting options.
Franchise Tax Rates, Thresholds and Compensation Deduction Limits
See Tax Rates for information on current and historic tax rate information.
Due Dates, Extensions and Filing Methods
Franchise tax reports are due on May 15 each year. If May 15 falls on a Saturday, Sunday or legal holiday, the next business day becomes the due date.
The Comptroller’s office will tentatively grant an extension of time to file a franchise tax report upon timely receipt of the appropriate form. Timely means the request is received or postmarked on or before the due date of the original report.
Houston Texas Franchise Tax