If you do business in Texas, you may be required to file and pay the Texas franchise tax. The due date is May 15th, and for many new business owners, the process can seem overwhelming. This guide explains the fundamentals of the Texas franchise tax, how to file, and strategies to avoid overpaying.
What is the Texas Franchise Tax?
The Texas Franchise Tax is a tax imposed on business entities that are either formed in or conducting business within Texas. Here are some key points to keep in mind:
-
Nexus in Texas: If your business has a significant presence or economic connection in Texas, you may be required to file.
-
Revenue Threshold: In 2023, businesses with revenue lower than $1.23 million are exempt from paying the tax, though filing is still required.
-
Form Options:
-
E-Z Form: Available for businesses with revenue less than $20 million.
-
Long Form: Some businesses may benefit from using the long form, especially if they can apply deductions for Cost of Goods Sold (COGS) or compensation.
-
How to Calculate the Franchise Tax Using the Long Form
When filing with the long form, follow these steps:
-
Report Key Figures:
-
Revenue
-
Cost of Goods Sold (COGS)
-
Compensation
-
-
Calculate the Margin:
Determine your margin by choosing the lowest value from the following calculations:-
Total revenue multiplied by 70%
-
Total revenue minus the cost of goods sold (COGS)
-
Total revenue minus compensation
-
Total revenue minus $1 million
-
-
Determine the Apportionment Factor:
Divide your equal gross receipts in Texas by your gross receipts from all sources. -
Calculate the Taxable Margin:
Multiply the margin (from Step 2) by the apportionment factor (from Step 3) and then subtract any allowable deductions. -
Compute the Tax Due:
Multiply the taxable margin by the applicable tax rate.
Note: The revenue apportionment ratio is a crucial factor in determining your taxable income. Keeping detailed shipping records can help ensure this ratio is calculated accurately, potentially saving you from overpaying taxes.
Final Thoughts
The Texas franchise tax is complex, with numerous rules and exemptions that can impact your filing process. It is highly advisable to consult with a Texas CPA to ensure that you comply with all tax laws and to get personalized advice tailored to your business needs.
