When tax time comes around, LLCs, corporations and partnerships who do business in Texas must be mindful of the Texas franchise tax. After determining they are liable, the next step should be to learn more about the law.
Ensuring proper payment and filing is an important aspect of avoiding penalties and other issues from not properly paying this tax.
Taxable margin
The taxable margin of a business is the basis for the franchise tax. To determine this margin, companies can use one of three methods based on their gross revenue:
- Subtract cost of goods sold
- Use 70%
- Subtract $1 million
- Subtract compensation, which includes wages and benefits
Revenue in each case is total revenue. This figure comes from the company’s reported federal income minus certain exclusions.
Exclusions
Exclusions include dividends and interest earned from federal obligations, Schedule C and items specified in IRS Code Sections 78 and Sections 951-964. They also include certain flow-through funds, and some industries have additional specific exclusions.
Filing
All entities that are required to file tax returns in Texas must file a Public Information Report annually, even if they do not owe taxes. This filing provides transparency about the entity’s structure, ensuring accountability and adherence to regulatory standards.
Entities must also file a Franchise Tax Report, even if no tax is due. The report will determine the franchise tax liability, if any.
Navigating the Texas franchise tax requires businesses to be aware of the intricacies of this tax law. Businesses can be confident about their liability by becoming more educated about the tax. Owners also must remember the annual due date for filing is May 15. Penalties apply for late filing.