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Texas - 2006 - Franchise Tax to be Replaced by Margin Tax
DESCRIPTION:
The Texas franchise tax is a privilege tax imposed on each
corporation and limited liability company chartered/organized in
Texas or doing business in Texas. For franchise tax purposes,
the term "corporation" also includes a bank, state limited
banking association, savings and loan association, limited
liability company, professional limited liability company, a
corporation that elects to be an S corporation for federal
income tax purposes, and a professional corporation.
DUE DATE:
A corporation's initial report is due one year and 89 days after
the corporation's beginning date in Texas. Thereafter, annual
reports are due each May 15.
RATE:
Greater of .25% (.0025) per year of privilege period of net
taxable capital or 4.5% (.0450) of net taxable earned surplus.
For the initial report, the net taxable capital rate is prorated
over the initial period.
ELECTRONIC REPORTING:
Not at this time. Refer to left hand column for filing and
payment information.
If you have specific questions about HB3, contact us at asktheexpert@saltsource.info or call us at (800) 940-9433.
Full Story
Governor Rick Perry signed into law HB3, which revises the existing franchise tax by changing the tax base, lowering the rate, and extending coverage to active businesses receiving state law liability protection.
The new Margin Tax was passed during the 79th 3rd Called Session in 2006. This bill amends Texas Tax Code Chapter 171 to revise the existing franchise tax by changing the tax base, lowering the rate, and extending coverage to all active businesses receiving state law liability protection. Changes made by HB3 are effective for franchise tax reports originally due on or after January 1, 2008. If your total revenue is less than or equal to $300,000, or your tax due is less than $1,000, you will owe no tax. All taxable entities must file a report, even if no tax is due.
SPECIAL NOTE TO TAXABLE ENTITIES
THAT ARE PART OF AN AFFILIATED GROUP:
Each taxable entity that is part of an affiliated group engaged
in a unitary business shall file a combined report in lieu of
individual reports, without regard to the $300,000 limitation on
revenue. All members of a combined group must use the same
method to compute margin (i.e. cost of goods sold, compensation
or 70%). See instructions for additional information. However,
each member of a combined group may use the worksheet below to
provide an estimate of the individual member’s portion of the
combined group’s tax liability before eliminations.
Overview
House Bill (HB) 3 was passed during the 79th 3rd Called
Session of the Texas Legislature. This bill amends Texas Tax
Code Chapter 171 to revise the existing franchise tax by
changing the tax base, lowering the rate, and extending coverage
to all active businesses receiving state law liability
protection. Changes made by HB3 are effective for franchise tax
reports originally due on or after January 1, 2008. Entities
Subject to Tax – The tax applies to partnerships (general,
limited and limited liability), corporations, limited liability
companies, business trusts, professional associations, business
associations, joint ventures and other legal entities with
statutory liability protection. Sole proprietorships, general
partnerships directly owned entirely by natural persons,
entities exempt under Subchapter B of Chapter 171, passive
entities, grantor trusts, estates of natural persons, escrows,
passive investment partnerships, certain family limited
partnerships, REMICs, and certain REITs are not subject to the
tax. Additionally, entities with revenues of $300,000 or less or
who calculate their tax due to be less than $1,000 will owe no
tax. However, all taxable entities, including those who will owe
no tax, must file a return. Texas Tax Code 171.0002.
Total Revenue
Total revenue is determined based on federal income tax
reporting. Total revenue for a taxable entity filing as a
corporation for federal tax purposes includes amounts entered on
line 1c of its federal tax return (Form 1120) plus the amounts
entered on lines 4 through 10, Form 1120. A taxable entity
filing as a partnership for federal tax purposes includes in
total revenue the amounts entered on line 1c, Form 1065, the
amounts entered on lines 4 through 7, Form 1065, and the amounts
entered on lines 2 through 11, Form 1065, Schedule K. From these
amounts a taxable entity may subtract, to the extent included in
revenue, bad debt expense, foreign royalties and dividends under
Section 78 and Section 951-964, Schedule C dividends and income
from a related entity. Specific exclusions from revenue include
flow-through funds mandated by law, fiduciary duty or contract,
such as sales tax, sales commissions to nonemployees, the tax
basis of securities underwritten and a general contractors flow
through payments to construction subcontractors. A lending
institution may exclude the principal repayment of loans. An
entity that provides legal services may exclude the following
flow-through funds: damages due the claimant; funds subject to a
lien or other contractual obligation arising out of the
representation, other than fees owed to the attorney; fees paid
to another attorney; reimbursement of case expenses and actual
out-of-pocket expenses, not to exceed $500 per case, for
providing pro bono legal services. Dividends and interest from
federal obligations are excluded. A staff leasing services
company shall exclude payments received from a client company
for wages, payroll taxes and employee benefits for the assigned
employees. A health care provider may exclude 100% of revenues
from Medicaid, Medicare, CHIP, workers’ compensation claims and
TRICARE, and actual costs for uncompensated care (healthcare
institutions may only exclude 50%). For purposes of this
calculator, total revenue cannot be less than zero. Texas Tax
Code 171.1011.
Cost of Goods Sold
“Goods” are defined as real or tangible personal
property sold in the ordinary course of business and includes a
computer program. Taxable entities that provide only services
are not eligible for a cost of goods sold deduction. A taxable
entity renting motor vehicles, heavy construction equipment or
railcar rolling stock may use cost of goods sold for costs
related to the property rented. Cost of goods sold includes all
direct costs of acquiring or producing the goods such as labor;
materials; handling costs including processing, assembling, and
inbound transportation; and storage costs. Cost of goods sold
also includes cost related to production related equipment and
facilities such as depreciation, rental and repair and
maintenance. Research, insurance, utilities, quality control and
licensing costs directly related to the production of goods are
also included. A taxable entity may deduct up to 4% of overhead
costs allocable to the production of goods. Lending institutions
that make loans to the public may deduct interest as a cost of
goods sold. Cost of goods sold does not include renting or
leasing costs that are not production related; selling costs;
distribution costs including outbound transportation costs;
advertising cost; interest; income or franchise taxes; and
officer compensation. Payments for undocumented workers are not
deductible. Any amounts excluded from line 1a may not be
included in the determination of cost of good sold. Texas Tax
Code 171.1012.
Wages and Cash Compensation
Wages and cash compensation include amounts reported for
Medicare wages and tips on Form W2; net distributive income from
partnerships, limited liability companies and S corporations to
natural persons; and stock awards and stock options deducted for
federal income tax purposes. Includes wages and cash
compensation paid to officers, directors, owners, partners and
employees. The deduction for wages and cash compensation is
limited to $300,000 per person. A taxable entity that is a staff
leasing services company should include only payment for the
entity’s own employees that are not assigned employees. A client
company that contracts with a staff leasing services company may
include wages for assigned employees but may not include an
administrative fee or payroll taxes. Payments for undocumented
workers are not deductible. Any amounts excluded from line 1a
may not be included in the determination of compensation. Texas
Tax Code 171.1013.
Employee Benefits
Benefits provided to officers, directors, owners,
partners and employees, including workers’ compensation, health
care and retirement benefits to the extent deductible for
federal income tax
purposes. Texas Tax Code 171.1013.
Texas Gross Receipts
Gross receipts in Texas include sales of real property
located in Texas, sales of tangible personal property when the
property is delivered or shipped to a purchaser within Texas,
services performed within Texas, rentals of property situated in
Texas, royalties from use of patents or copyrights within Texas,
revenues from the use of trademarks, franchises or licenses
within Texas and all other business revenue within Texas
including dividends and interest from Texas payors. Any amounts
excluded from line 1a may not be included in the determination
of Texas Gross Receipts. Texas Tax Code 171.103.
Everywhere Gross Receipts
Gross receipts everywhere includes all sales of real
property, all sales of tangible personal property, all services,
all rentals, all royalties from use of patents, copyrights,
trademarks, franchises or licenses and all other business
revenue including dividends and interest. Any amounts excluded
from line 1a may not be included in the determination of
Everywhere Gross Receipts. Texas Tax Code 171.105.
Tax Due
The tax rate is 0.5 percent for entity’s primarily
engaged in retail and wholesale trades as well as those
businesses under Major Group 58 (eating and drinking
establishments). The rate is 1 percent for all other taxable
entities. Texas Tax Code 171.002.
Credits
A taxable entity that previously qualified for a
research and development credit, capital investment credit, or
job creation credit may claim unused carryovers and installments
to offset the tax on margin. Each credit is limited to 50% of
the tax due before using the credit. No additional credits for
research and development, capital investment, or job creation
may be created. In addition, a corporation may take a credit
based on business losses accrued under Tax Code Section
171.110(e) that were not expired or exhausted on a report due
prior to January 1, 2008. The credit is 10 percent of the
business losses multiplied by the appropriate margins tax rate
and expires September 1, 2016. Texas Tax Code 171.111.
Combined Reporting Taxable entities that are part of an affiliated group engaged in a unitary business shall file a combined group report in lieu of individual reports, without regard to the $300,000 limitation on revenue. All members of a combined group must use the same method to compute margin (i.e. cost of goods sold, compensation or 70%). An affiliated group is a group of one or more entities in which a controlling interest (80%) is owned by a common owner or owners, either corporate or non-corporate, or by one or more of the member entities. A unitary business is defined as a single economic enterprise that is made up of separate parts of a single entity or of a commonly controlled group of entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
Margin for the combined group is calculated by adding the total revenue for each entity, subtracting the cost of goods sold/compensation for each entity and then subtracting items of revenue and cost of goods sold/compensation from one member of a combined group to another member of the combined group.
For apportionment purposes, Texas Gross Receipts of a combined group should include only receipts for entities within the group that have nexus in Texas. Receipts from transactions between members that are excluded from revenue may not be included in Texas Gross Receipts except for receipts from the sale of tangible personal property between members where one member party to the transaction does not have nexus in Texas.
Everywhere Gross Receipts for a combined group should include receipts for all entities within the group, regardless of whether the entities have nexus in Texas. Receipts from transactions between members that are excluded from revenue may not be included in Everywhere Gross Receipts. Texas Tax Code 171.1014.
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