Basics of Texas Franchise Tax: A Guide for Business Owners

If you do business in Texas, you may have to file for and pay Texas franchise tax.  

The due date is May 15th.

It can be overwhelming if you are new to it. 

I will explain the basics you need to know about the Texas franchise tax, how to file, and how to avoid overpaying.

What is Texas Franchise Tax?

The Texas Franchise Tax is imposed on business entities formed or doing business in Texas. It means you may have to file if you have Nexus in Texas.

If your revenue is lower than $1.23M in 2023, you don't have to pay the franchise tax, but you still need to file.

You can file an E-Z form if your revenue is less than $20 million. However, some businesses may be better off using the long form because COGS, or the compensation deduction, can be used.

The following are the steps to calculate the franchise tax using the long form:

Step 1: Report revenue, COSG, and compensation

Step 2: Calculate the margin

• Total revenue times 70%
• Total revenue minus the cost of goods sold (COGS)
• Total revenue minus compensation
• Total Revenue minus $1 million

Enter the lowest amount.

Step 3: Calculate the apportionment factor by dividing equal gross receipts in Texas by gross receipts everywhere.

Step 4: Calculate the taxable margin by multiplying the apportionment factor in Step 3 by the margin in Step 2 and minus allowable deductions.

Step 5: Calculate the tax due by multiplying the tax rate by the taxable margin in Step 4

As shown from the above calculation, the revenue apportionment ratio is an important factor in determining taxable income. Maintaining good shipping records could help businesses accurately calculate this ratio and avoid overpaying taxes.

Overall, the Texas franchise tax is quite complex, with many rules and exemptions, so it is important to consult a Texas CPA to ensure compliance with tax laws.