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How To File The Texas Annual Franchise Tax Report

How To File The Texas Annual Franchise Tax Report

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How To File The Texas Annual Franchise Tax Report

One requirement for maintaining a Limited Liability Company (LLC) or corporation in the state of Texas is filing the Texas Annual Franchise Tax Report (sometimes called an Annual Report) with the Texas Comptroller of Public Accounts. Here, we will go over what the report is, its cost, its due date, and more.

What is the Texas Franchise Tax?

The Texas Franchise Tax is not a tax only for franchised businesses, but it is a tax imposed on businesses for the privilege of operating in Texas.  

The Texas Franchise Tax is one of the many taxes that businesses must pay to operate in the state. It is based on a business’s gross receipts and type of business activity.

Who must pay the Texas franchise tax?

Most businesses operating in Texas must pay the privilege tax unless they are specifically exempt. The tax is not imposed on
– Sole proprietorships
– General partnerships directly owned by natural persons and;
– Other specified entities such as certain financial services businesses, nonprofits, and others.

Generally, corporations and LLCs (Limited Liability Company) will commonly pay the Franchise Tax. 

An out-of-state taxable entity that does not have a physical presence in Texas is considered as having nexus and required to pay the Texas Franchise Tax if it has gross receipts of $500,000 or more. 

Which entities are excluded from the Texas Franchise Tax?

Certain legal entities, including charities, most governmental entities, and some types of non-profit organizations, are exempt from the franchise tax.

In addition, Texas corporations that are solely engaged in manufacturing, selling, or installing solar energy devices are exempted from the franchise tax.

How is the Franchise Tax calculated?

The franchise tax is calculated by multiplying a business’s gross receipts by the type of business entity. The franchise tax rate is 0.75% for most businesses and 0.375% for retail and wholesale businesses.  

The tax is based on the entity’s margin, which can be calculated in several different ways. Margin is the lowest of the following four computations times the apportionment factor.  
– Total revenue minus the cost of goods sold
– Total revenue minus compensation
– Total revenue minus $1 million, or;
– 70% of total revenue. 

Total revenue is calculated based on the taxpayer’s federal income tax return.

Cost of goods sold (COGS) generally includes the costs related to the acquisition and production of tangible personal property and real property. 

There is a deduction for compensation and benefits, which include W-2 wages, cash compensation, and benefits such as workers’ compensation, health care, and retirement benefits. Compensation does not include 1099 labor or payroll taxes paid by the employer.

Taxable entities with annualized total revenue of $1,180,000 or less owe no tax. Taxable entities who calculate their tax due to be less than $1,000 will owe no tax. However, all taxable entities, including those that will owe no tax, must file a return.

What happens if I don’t pay the Texas Franchise Tax?

If you don’t pay the franchise tax, your business may be subject to penalties, interest, and fees. In severe cases, the state can shut down your business.

When is the Texas Franchise Tax due?

The Texas Franchise Tax Report and franchise tax payment are due May 15th of each year. If the deadline falls on a weekend or holiday, it will be the next business day.  

How is the Texas Franchise Tax filed?

The Annual Franchise Tax Report and franchise tax payment are sent to the Texas Comptroller of Public Accounts online, by mail, or in person.

If my company doesn’t owe the franchise tax, do I still have to file a report?

Yes. If the franchise tax isn’t owed, all businesses required to pay it must file Form 05-163, Texas Franchise Tax No Tax Due Information Report, with the Texas Comptroller’s Office.

Additional Resources

For more information on the franchise tax, visit the Texas Comptroller’s website or read the Texas Franchise Tax Guide.

How To File The Texas Annual Franchise Tax Report

How To File The Texas Annual Franchise Tax Report

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