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;
Do Sole Proprietors pay franchise tax in Texas?
The Franchise Tax. Nearly all business types in the state are subject to the franchise tax; the only exceptions are sole proprietorships and certain types of general partnerships. Corporations, S corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs) all pay the franchise tax.
What is the difference between sole proprietorship and partnership in Texas?
Partnerships and Sole Proprietorships. Most Texas small businesses that are partnerships pay the franchise tax, while sole proprietorships do not. The litmus test in a partnership is whether the business is directly owned by natural persons, with the income from the business distributed directly to those persons.
Is a non-Texas entity subject to the franchise tax?
TTC 171.0002 (d). Is a non-Texas entity that owns a royalty interest in an oil or gas well in Texas subject to the franchise tax? Yes. A royalty interest in an oil or gas well is considered an interest in real property.
When are franchise tax reports due?
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.
What is franchise 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:
How much is the penalty for filing franchise tax return?
You can file your franchise tax report, or request an extension of time to file, online. There is a $50 penalty for a franchise tax report filed after the due date, even if no tax is due with that report and even if the taxpayer subsequently files the report.
How is margin apportioned in Texas?
Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts.
Who must file a combined group report?
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.
Do you have to file franchise tax in Texas?
Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:
How to file a franchise tax report in Texas?
How to File. There are three ways to file the Texas Franchise Tax Report: No Tax Due. EZ Computation. Long Form. If your business falls under the $1,110,000 revenue limit, then you don’t owe any franchise tax. If you are above the limit, you can choose to fill out and file the EZ Computation form or to take the time to fill out the Long Form.
What is franchise tax in Texas?
What is the Texas Franchise Tax? The Texas Franchise Tax is levied annually by the Texas Comptroller on all taxable entities doing business in the state. The tax is based upon the entity’s margin, and can be calculated in a number of different ways.
How many types of franchise tax extensions are there?
There are four different types of Franchise Tax Extensions, depending upon your situation.
How is Total Revenue Calculated?
Total revenue is calculated by taking revenue amounts reported for federal income tax and subtracting statutory exclusions.
Is a royalty interest in an oil well in Texas subject to franchise tax?
12. Is a non-Texas entity that owns a royalty interest in an oil or gas well in Texas subject to the franchise tax? Yes. A royalty interest in an oil or gas well is considered an interest in real property . Therefore a non-Texas entity that owns a royalty interest in an oil or gas well in Texas is considered to own real property in Texas ...
Is a partnership taxable?
Yes, to qualify as a non-taxable entity, the partnership must be a general partnership. TTC 171.0002 (b).
Is a passive entity taxable?
A passive entity as defined by TTC 171.0003 is not a taxable entity. TTC 171.0002 (b) (3). (See FAQ#8 under Passive Entities Rule 3.582 for possible reporting requirements.)
Do you have to file a separate franchise tax report in Texas?
Yes. The determination of responsibility for Texas franchise tax is based on the legal formation of an entity. An entity’s treatment for federal income tax purposes does not determine its responsibility for Texas franchise tax. Therefore, each taxable entity that is organized in Texas or doing business in Texas is subject to franchise tax, even if it is treated as a disregarded entity for federal income tax purposes. The entity is required to file a separate franchise tax report unless it is a member of a combined group. If the entity is a member of a combined group, the reporting entity may include the disregarded entity with the parent’s information; in that event, both entities are presumed to have nexus. (Updated 04/10/08)
Is a joint venture taxable?
No; a joint venture that is wholly and directly owned by natural persons is not a taxable entity. (Updated 06/19/08)
Is a limited liability company subject to franchise tax?
Yes; a limited liability company that is organized in Texas or is doing business in Texas is subject to the franchise tax. (Updated 06/19/08)
Is a sole proprietorship taxable?
A sole proprietorship that is not legally organized in a manner that limits its liability is not a taxable entity. A single member limited liability company filing as a sole proprietor for federal income tax purposes is a taxable entity. TTC 171.0002 (d).
What is the exemption for franchise tax in Texas?
One of the most important exemptions for the Texas franchise tax is the exempt passive entity. Exempt passive entities will be required to file annual information statements to verify that the passive entity qualifications are met, but they will owe zero tax.
What is a taxable entity in Texas?
In addition, taxable entities include not only corporations and LLCs, but generally any entity with limited liability protection. Also introduced for the first time in Texas is the idea of unitary filing, something very alien to Texans. The only things that did not change are the due date of the tax, May 15 of each year, and the tax’s accounting period rules.
How is total revenue determined in Texas?
Total revenue is determined by extracting revenue from specific lines on the federal income tax forms (TX Tax Code §171.1011 (c) (1) (A)). Next, total revenue is reduced by applicable exclusions per Texas law. Exclusions tend to be based on industry, such as medical, legal, staff leasing services, and management companies (TX Tax Code §171.1011). Other exclusions include bad debt, income attributable to a disregarded entity, and net distributive income from partnerships and flowthrough partnerships (TX Tax Code §171.1011 (c) (1) (B)).
When to use tiered partnership?
Practice tip: The tiered partnership election should be used when the taxable entity is using the compensation deduction. Because some of the owners are other taxable entities, the lower-tier entity is not able to use the full compensation deduction through net distributive income. By making the election, the total tax paid by the lower- and upper-tier entities decreases. In addition, the upper-tier entities may elect to use either the deduction method or the E-Z method, even if the lower-tier entity does not use the same method, which could increase the tax savings even more. This is premised on the notion that the election need be available only at the lower level and not necessarily elected by the lower-level entity.
What is a state tax movement?
A current movement in state taxation is the introduction of a gross receipts or modified gross receipts tax in place of a net income tax. For example, Ohio, Kentucky, and New Jersey have all enacted some form of gross receipts tax in this decade. By joining this select crowd, Texas modified its old franchise tax, which was based on the capital or earned surplus of corporations and limited liability companies (LLCs) conducting business in Texas.
Can you deduct interest expense on a Texas COGS?
The rules also allow for a few small exceptions to the general Texas COGS. First, if an entity qualifies as a lending institution, that taxable entity may elect to use as COGS an amount equal to its interest expense (TX Tax Code §171.1012 (k)). Certain rental companies are also entitled to the Texas COGS deduction: motor vehicle renting or leasing companies that remit a tax on gross receipts imposed under Texas Tax Code §152.026; heavy construction equipment rental or leasing companies; or railcar rolling stock rental or leasing companies (TX Tax Code §171.1012 (k-1)).
When are franchise taxes due?
Due to the late release of the forms and the complexity of the tax, the comptroller’s office extended the due date of the franchise tax for both initial and annual filers from May 15 to June 16. The tax is still technically due on May 15, but the penalty is waived for this one-month period.
What happens if you don't get your franchise tax report in Texas?
If the Comptroller’s office does not receive your franchise tax report (and payment, if you owe one) within 45 days of the deadline, they are required by law to forfeit your business’s right to transact business in Texas. This forfeiture is essentially a loss of corporate liability protection: business owners will become liable for the debts of the business, and the entity will not be permitted to defend itself in a court of law.
What is franchise tax in Texas?
The Texas Franchise Tax is an annual business privilege tax processed by the Texas Comptroller of Public Accounts. Essentially, it’s a tax levied on business owners in exchange for the opportunity to do business in Texas. Here's what you should know about it.
What does independent Texas do?
When you hire Independent Texas to form your Texas company or serve as your registered agent, we keep your state correspondence organized, send you multiple reminders ahead of the franchise tax due date, and provide affordable franchise report filing service.
How to check if a franchise is active in Texas?
How can I check my business’s Texas Franchise Tax status? You can check on the Texas Franchise Tax account status of your company (or another company) by conducting an online Taxable Entity Search on the Comptroller’s website. To search for a business, enter its name, 11-digit Texas taxpayer ID number, 9-digit Federal Employer Identification Number (FEIN) or Texas SOS file number. Once you locate the business you’re looking for, click on the blue “Details” button to the left of the business name. Under the “Franchise Search Results” tab, you’ll see an item called “Right to Transact Business in Texas.” If the right to transact business is “Active,” then the entity is still entitled to conduct business in Texas.
How often do you need to file a franchise tax return in Texas?
But whether or not tax is owed, you’ll need to file a Texas Franchise Tax Report every year to keep your business in good standing.
How to pay taxes on Webfile?
Log in to WebFile. From the eSystems menu, select WebFile / Pay Taxes and Fees.
What is total revenue in Texas?
Total Revenue This is the total income from your entire business during the tax year—including gross receipts or sales, dividends, interest, rents, royalties and other income—minus federal statutory deductions. The dollar amounts you list on your Texas Franchise Tax Report will correspond with specific line items on your business’s IRS tax return.
What is the difference between franchise tax and income tax in Texas?
The difference between corporate income tax and a corporate franchise tax is that income taxes apply to profit while franchise taxes do not apply to profit. A corporate franchise tax is essentially a fee that a company must pay for the privilege of doing business in a city or state.
What is the tax rate for wholesalers in Texas?
The tax for wholesalers and retailers is 0.375%. The tax rate for businesses other than retail and wholesale is 0.75%. 2. It's worth emphasizing that this is a tax on gross receipts, not on net corporate income. Texas is one of only four states with this type of system. The others are Nevada, Ohio, and Washington .
What is LLC tax?
Limited Liability Company Taxes. LLC is the other common designation for small businesses. In most states, LLCs are entities that protect business owners from certain legal liabilities but pass their incomes to those owners, who pay personal income tax rather than business income tax on their proceeds.
What is the economy of Texas?
Texas has the second-largest economy in the U.S., with a gross state product of $1.76 trillion in 2020. 1 Much of that money is made in the oil and gas industry, though farming, steel, banking, and tourism were also big contributors. Part of the reason may be that Texas, in the 21st century, has a very pleasant business climate.
Does Texas have franchise tax?
Like most states, Texas subjects corporations to its standard business tax, the franchise tax. As with all businesses, the no-tax-due threshold and E-Z Computation rules apply to corporations.
Is a partnership subject to franchise tax in Texas?
The majority of partnerships in Texas, including LPs and LLPs, are subject to the franchise tax.
Is a small business a corporation in Texas?
Most small businesses are not corporations, but they sometimes switch from LLCs and S corporations to C corporations when their growth reaches a certain level. Therefore, it is helpful to understand how corporations are taxed in Texas.
