Navigating Texas Franchise Tax Requirements for Businesses

Starting and operating a business in Texas offers many advantages. Advantages include a favorable business climate and no state income tax. But, like other states, businesses must comply with the state requirements for Texas franchise tax. Understanding these requirements is crucial for maintaining good standing and avoiding penalties.

What does the Franchise Tax in Texas mean?

The franchise tax in Texas is a privilege tax. The tax is imposed on each taxable entity formed or organized in Texas or doing business in the state. It’s a tax on the right to do business in Texas. The tax applies to most business structures including corporations, limited liability companies (LLCs), partnerships, and other legal entities.

Who Must File?

As of 2024, only taxable entities doing business in Texas who owe the tax must file a franchise tax report. This includes:

• Corporations: Both C corporations and S corporations
• Limited Liability Companies (LLCs): Including single-member LLCs
• Partnerships: General partnerships, limited partnerships, and limited liability partnerships
• Professional Associations and Business Trusts

Certain entities, such as sole proprietorships (except for single-member LLCs) and general partnerships directly owned by natural persons, are exempt from the franchise tax.

Calculating the Texas Franchise Tax

The franchise tax is calculated based on a business’s margin, which can be determined in several ways:

1. Total Revenue Minus Cost of Goods Sold (COGS)
2. Total Revenue Minus Compensation
3. Total Revenue Minus $1 Million
4. Total Revenue Multiplied by 70%

Businesses can choose the method that results in the lowest tax liability. The tax rate varies depending on the business type:

• Retail/Wholesale: 0.375%
• Other Businesses: 0.75%

For reports originally due on or after Jan. 1, 2024, a taxable entity whose annualized total revenue is less than or equal to $2.47 million is no longer required to file a No Tax Due Report. However, the entity is still required to file Form 05-102, Public Information Report (PDF), or Form 05-167, Ownership Information Report (PDF).

Filing Requirements and Deadlines

Businesses that owe a franchise tax must file the report annually, typically by May 15th. If the due date falls on a weekend or a state holiday, the report is due on the next business day. The required filings include:

• Franchise Tax Report: Detailing the calculations and amount of tax due.
• Public Information Report (PIR) or Ownership Information Report (OIR).  Form 05-102, Public Information Report (PDF) or Form 05-167, Ownership Information Report (PDF).

Filing Extensions

Texas offers extensions for filing the franchise tax report. Businesses can ask for more time by filling out the right forms and paying 90% of the tax they owe or what they owed last year, whichever is less. The extension typically provides an extra six months to file the report.

Penalties for Non-Compliance

Failure to file or pay the franchise tax on time can result in penalties and interest. The penalties are as follows:

• 5% of the tax due if not paid by the due date.
• An extra 5% if not paid within 30 days after the due date.
• Interest accrues on the unpaid tax and penalties from the due date until the date of payment.

Non-compliance can result in forfeiture of the right to transact business in Texas. Forfeiting that right creates personal liability for the business’s debts and possible dissolution.

Tips for Compliance

• Maintain Accurate Records: Ensure all financial records are accurate and up-to-date. That will also help simplify the calculation of the margin and tax liability.
• Choose the Best Calculation Method: Evaluate all four margin calculation methods. Determine which one results in the lowest tax liability.
• Meet Deadlines: Mark your calendar with the May 15th filing deadline. Ensure reports and payments are submitted on time.
• Consult a Professional: Consider consulting with a tax professional or accountant. Choose one who is familiar with Texas franchise tax laws to help navigate the complexities and ensure compliance.

Conclusion

Understanding and following the rules for the Texas franchise tax might feel confusing, but it’s really important to keep your business safe. You can do this by keeping your paperwork neat, figuring out taxes, sending in your forms on time, and getting help from experts if you’re stuck. For more help, check out the Texas Comptroller’s website and the Rapid Registered Agent website. They have forms and instructions to guide businesses through the process of paying their franchise taxes.