Texas Margin Tax - Details - updated for technical corrections

The Franchise Tax will be imposed on any taxable entity conducting business in the State of Texas. Under the old law, the Franchise Tax was only assessed against Corpoarations and Limitied Liability Companies. The definition of taxable entity has been expanded to include Limited Liability Partnerships, Limited Partnerships, and Professional Associations. It even has a catch-all phrase to include any organization afforded asset protection by the state of Texas.

The only entities not subject to the tax are sole proprietorships, general partnerships owned entirely by natural persons, passive entities and entities exempt from tax.

The Franchise Tax is calculated on the Taxable Margin at the rate of 0.5% per year for retailers and wholesalers or 1% per year for all other entities.

Small businesses with a tax liability less than $1,000 or revenue less than $600,000 are exempt from the tax.

The Taxable Margin is computed by calculating the lesser of * 70% of total revenue or * 100% of total revenue less cost of goods sold (the law has included a specific definition for goods) or * 100% of total revenue less compensation and employee benefits

The result is multiplied by a single factor apportionment factor. Subtracting allowable deductions from the apportioned results in the Taxable Margin.

Revenue figures will be obtained from the corporate or partnership returns. Revenue includes Gross revenue, dividends, interest, rents, royalties, capital gains, ordinary from partnerships, estates and trusts and the general catch-all other income.

A subtraction from revenue is allowed for bad debt, foreign royalties and dividends, net distributiive income from partnerships, trusts and limited liability companies treated as either partnerships or S corporations for federal income tax purpose.

One important new aspect of the Franchise Tax is the combined reporting requirement for taxable entities that are part of an affiliated group engaged in a unitary business.

An affiliated group is a group of one or more entities in which a controlling interest is either owned by a common owner(s) or by one or more member entities. Controlling interest is defined as common owners with a greater than 50% ownership interest.

To reduce the effects of the transition from the old franchise tax to the new franchise tax, a temporary credit on taxable margin may be taken for twenty years through 2026.

The credit is the difference between:

  • The entity’s deductible temporary differences and net operating loss carryforwards, net of related valuation allowances as per the entity’s books at the end of the taxable year ending in 2006 and
  • The entity’s taxable temporary differences stated on the books as of the same date.

The Comptroller of Public Accounts should be notified in writing, no later than March 1, 2007 to preserve the right to take the credit.

The new Franchise Tax legislation is a significant change for many organizations conducting business in Texas. Questions regarding compliance and accounting still need to be answered before the first reports are filed in 2008.

Wow! That is a lot of information to digest at one time. Does this effect my organization? We understand that and we have sought out one of the most respected state tax authorities in Texas to train us on how this tax will impact our clients so we can start working with you to change how you account for and determine revenues, how your contracts are worded, how your chart of accounts is set up, In the meantime, if you have any questions about this tax and how your organization can work to reduce it’s impact on your organization please contact Christopher Ford at 214.827.9118 to set up a time we can begin to assess the tax and discuss how you can start to minimize its effect on your business.

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