Texas requires most business entities, such as corporations, LLCs, and partnerships, to file an annual franchise tax report and then pay franchise taxes. Franchise taxes are essentially an amount charged by the State for the privilege of doing business in Texas and are generally based on the business’ annual revenue. Some significant changes and adjustments in the Texas franchise tax are effective for 2014 and future years. Many changes are industry specific or relate to taxable margin calculations beyond the scope of this note, but the following is a short summary of the good news.
Lower Rates. In June of 2013, Governor Rick Perry signed HB 500, which temporarily lowers the franchise tax rate for franchise tax reports due in 2014 and 2015. For 2014, a taxable entity may elect to pay a rate of 0.975% of taxable margin. A taxable entity primarily engaged in retail or wholesale trade may elect to pay a rate of 0.4875% of taxable margin. For 2015, the general rate drops to 0.95% of the taxable margin, while the rate for retailers and wholesalers drops to 0.475% of taxable margin.
There is one catch: the lower rates for 2015 apply only if the Comptroller of the State of Texas certifies on or after September 1, 2014 that probable revenue for the fiscal biennium ending 8/31/15 will exceed the Comptroller’s revenue estimate for 2014-2015 by an amount sufficient to offset the loss of probable revenue resulting from the lower rates. If the Comptroller does not make this certification, rates for 2015 increase to the previous 1.0% and 0.5% rates. Rates for those entities that qualify for and elect the EZ computation form remain at .575%.
Higher Thresholds. The CPI adjustment has increased the compensation deduction limitation from $330,000 to $350,000. The “no tax due threshold” has increased from $1,030,000 to $1,080,000. Remember, franchise tax reports and public information reports must be filed even if you are below the no tax due threshold.