Corporate Franchise Tax

The following information is taken from the Texas State Comptroller's website.  For more information please visit their website.

Overview

The Texas franchise tax is imposed on each taxable entity formed in Texas or doing business in Texas. Major legislative changes to the franchise tax generally apply to reports originally due on or after Jan. 1, 2008. These changes include imposition of the tax on most legal entities, a revised tax base called “margin” and a different tax rate. Certain small businesses may be eligible to file a No Tax Due Report, and an E-Z filing option is available for those with $10 million or less in total revenue. The tax is often referred to as “the revised Texas franchise tax.”

Entities Subject to Tax

The revised Texas franchise tax is imposed on corporations, limited liability companies (even if directly owned by one person); partnerships (general, limited and limited liability); business trusts; professional associations; business associations and other legal entities that are organized in Texas or that do business in Texas. See Franchise Tax Rule 3.586 for a list of some activities considered to be “doing business in Texas.”

The tax is not imposed on the following:

• sole proprietorships;
• general partnerships where direct ownership is composed entirely of natural persons (except for limited liability partnerships);
• entities exempt under Subchapter B of Chapter 171 in the Texas Tax Code;
• certain unincorporated passive entities;
• certain grantor trusts, estates of natural persons and escrows; and/or
• real estate mortgage investment conduits (REMICs) and certain real estate investment trusts (REITs).

Margin

The tax base is the taxable entity's margin. Margin should equal the least of three calculations based on eligibility:

• total revenue minus cost of goods sold;
• total revenue minus compensation; or
• total revenue times 70 percent.

Tax Rate

The tax rate is 1 percent for most taxable entities. For entities meeting the following criteria, the tax rate is 0.5 percent:

• the entity is primarily engaged in the retail or wholesale trade under division F or G of the 1987 Standard Industrial Classification Manual;
• the total revenue from activities in retail and wholesale trade is greater than the total revenue from activities in trades other than the retail and wholesale trade;
• less than 50 percent of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and
• the taxable entity does not sell retail or wholesale utilities, including telecommunications services, electricity or gas.