The Texas franchise tax is imposed on companies doing business within the state. To calculate the tax you must know how much money your company earns annually. If you are unsure about what your income level is, contact us today. We will help you determine whether or not you owe taxes.
Who Must Pay the Franchise Tax?
Corporate franchises are a way to make money off of businesses without having to actually start one yourself. A franchise fee is charged to cover the cost of running the franchise office, marketing, advertising, etc. These fees are usually passed along to customers in the form of increased prices. But what happens when a state doesn’t collect enough revenue to pay for government functions like schools and police departments? In those cases, corporations must foot the bill themselves.
This is a tax on gross receipts, not profits. So, even though you might sell $100 worth of products, you still owe taxes on the entire amount. This applies to both individual businesses and multi-state corporations.
There are four states that don’t have a corporate income tax — Florida, Georgia, Illinois and New York. And it’s not just small businesses that benefit from this exemption. Some of the biggest names in American commerce, including Apple, Amazon, AT&T, Coca Cola, ExxonMobil, General Electric, McDonald’s, Nike, Procter & Gamble, Starbucks, Walmart, Wells Fargo, and many others, operate under similar exemptions.
Which Entities Are Excluded?
The IRS publishes a list of entities that are excluded from taxation. These include sole proprietorships, general partnerships, certain unincorporated passives, grantor trusts, estates, escrow accounts, real estate mortgage investment conduits, qualified real estate investment trusts, non profit self insurance trusts, and trusts exempt except under IRS Code Section 501(c)(9), among others.
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Calculating the Franchise Tax
The franchise tax is a state tax paid directly to the state by businesses. Businesses must pay this tax regardless of whether they operate out of state. In addition to paying the franchise tax, businesses must file annual reports with the state. These reports include information such as sales, payroll, and net income.
Businesses that make $50,000 or less per year do not have to pay the franchise tax. However, those making over $50,000 must pay the state 7% of their total revenues. Some states require businesses to calculate the franchise tax differently; however, the calculations used here apply to most states.
How is Total Revenue Calculated?
The IRS defines statutory exclusions as deductions when determining taxable income. These include tax credits, depreciation, and foreign taxes paid. They do not affect the amount of tax owed.
Statutory exclusions are used to determine the number of gross receipts. Gross receipts are the total sales price fewer discounts, allowances, returns, and refunds. This includes both domestic and international transactions.
Available Tax Credits
The Texas Tax Code provides several tax credits for businesses operating within the state. This article focuses specifically on those tax credit programs that assist small businesses. These include the following:
Temporary Credit for Business Losses under TX Tax Code Section 171.111
Research and Development Activities Credit under TX Tax Code Chapter 171, Subchapter M
Certified Historic Structures RehabilitationCredit under TX Tax Code Chapter171, Subchapter S
How to File Texas Franchise Tax
There are three ways to file your Texas Franchise Tax Return. You can do it online; you can use our free eFiling tool; or you can download and print the Long Form.
If your business falls under the revenue limit of $1,110,00, you don’t owe any tax. However, if you’re over the limit, you must either complete and file the EZ Compute or the Long Form.
Frequently Asked Questions
Is Texas franchise tax the same as an income tax?
1. Franchise Tax
Franchise taxes are taxes imposed on corporations that have headquarters outside of Texas. These taxes are based on the corporation’s profits earned in Texas. A corporation may pay franchise tax if its taxable gross receipts exceed $25 million per year. The corporation pays no franchise tax if it does not meet these requirements.
2. Income Tax
Income tax is a tax levied on individuals and businesses for the privilege of earning money. In Texas, the state imposes an individual income tax at rates ranging from 2% to 6%. Companies that earn over $250,000 annually are subject to corporate income tax.
What is the income threshold for Texas franchise tax?
1. Franchise Tax
The franchise tax is imposed upon each corporation doing business in Texas at the rate of $25 per year for each $100,000 or fraction thereof of its total capital employed in this state. A corporation shall pay the franchise tax on January 1st of each calendar year.
2. Capital Employed
Capital employed means the sum of the following items: (a) the value of tangible property owned and used directly in connection with the activity for which the corporation was organized; (b) the amount paid out for interest-bearing debt secured by mortgage or deed of trust on real estate held primarily for sale to customers in the ordinary course of trade or business; (c) the market value of shares of stock issued by the corporation; (d) the book value of any indebtedness owed by the corporation to persons who have furnished goods or services to the corporation; and (e) the book value of intangible assets used in the activity for which the company was organized.
3. Income Threshold
The income threshold is defined as the lesser of the average annual gross receipts over the preceding three years or $250,000.00.
James Rourke is a business and legal writer. He has written extensively on subjects such as contract law, company law, and intellectual property. His work has been featured in publications such as The Times, The Guardian, and Forbes. When he’s not writing, James enjoys spending time with his family and playing golf.