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Texas Franchise Tax FAQs
With Bloomberg reporting that large tech companies and hedge funds are moving operations to Texas for “lower taxes”, there must be a good reason, right? While it’s true that there is no Texas income tax, businesses do still have state tax obligations, namely the Texas Franchise Tax.
What is Texas franchise tax?
Texas is one of only six states that do not have a corporate income tax. Texas businesses are instead required to pay a franchise tax – companies pay what is basically an annual fee to Texas for the privilege of doing business in the state. It is a tax on revenue and is less than 1%.
Who pays Texas franchise tax?
All taxable entities formed, organized, or doing business in Texas, with revenue over $2.47M, are subject to the franchise tax. Exceptions include sole proprietorships not registered as an LLC, passive partnerships, and certain non-profits and trusts.
What are the Texas franchise tax rates?
- Revenue < $2.47M – No franchise tax due
- Revenue > $2.47M – 0.375% for Retail or Wholesale; 0.75% for all other industries
How is the Texas franchise tax calculated?
The Texas franchise tax calculation is based on margin, which can be calculated using one of the following methods:
- Total revenue times 70%
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation
- Total revenue minus $1M
or
- EZ Computation* – Total revenue times apportionment factor, then apportioned total revenue times tax rate of 0.331%. Only businesses with an annualized total revenue of $20M or less qualify for EZ Computation
What businesses does the Texas franchise tax impact the most?
Service industries, especially those with a low employee count, are generally the most affected by the Texas franchise tax as they do not have a COGS deduction. Manufacturing and retail, on the other hand, do have the COGS deduction as well as the advantage of a reduced 0.375% tax rate, both of which help minimize their tax burden.
Do you have to pay Texas franchise tax if you’re not headquartered in Texas?
As of January 1st 2020, out-of-state taxable entities with annual gross receipts over $500,000 from business in Texas must file a Franchise Tax Report even if the entity has no physical presence in this state.
What is the biggest mistake businesses make when filing their Texas franchise tax?
As a general rule, businesses need to keep good records of two key components: sales by state and cost of goods sold (both direct and indirect). This will ensure that when it’s time to file, the most optimal method to calculate the franchise tax due can be used. This will also help avoid some of the other common mistakes we’ve seen, such as:
- Missing exclusions for Medicaid and Medicare income (for medical providers)
- Not structuring commission agreements so that the commission expense is an exclusion
- Double counting income that was already reported on a flow-through franchise return
- Not realizing some real estate providers may qualify for the COGS deduction
- Not applying the reduced 0.375 rate for retailers and wholesalers
Calculation methods, available credits, billing/contracting changes…it’s a lot to think about. Working with a Texas CPA, like David French & Associates, can set you on the right path to painlessly filing your Texas Franchise Tax Report.
Our Texas CPA Firm’s mission is to help clients create generational wealth through tax strategy.
We focus on building meaningful relationships and take the time to understand who you are and where you want to go. This passion for helping others comes from our founder’s personal journey. Mentors, coaches, teachers, and family members have all pushed David back on track at various times throughout his early life. Without the guidance of others, especially through the toughest of times, our firm would not exist today. A strong resolve and great perspective is what you’ll find in our organization. This allows us to help others through challenges of all shapes and sizes.
Here's what our clients have to say about us
“I was introduced to David while dealing with an accounting issue involving one of my startups. We had hit a wall and he jumped right in, identified the problem and recommended a solution. I was impressed how quickly he understood what was going on and helped us remedy it.”
Brian YeakeyPrivate Investor & VP, Inner Light Ministries
“After working with the same accountant for 25 years, upon retiring she recommended David French. As I pivot from starting companies to investing in companies, I need a CPA who can help me think strategically about the implications of my investments. David French has been a great value-add as an advisor and consultant.”
John ConstantineSerial Entrepreneur & Investor
“There is no shortage of CPAs in Austin, but it’s hard to find one that has the depth of experience with M&As, joint venture, closeout reconciliation and tax strategy that David French has. We were grateful to find a single partner boutique firm that offers no-bullshit advising to help us navigate and grow our business ventures.”
Patrick CourtneyManaging Partner, Activus Capital Partners
At David French & Associates, we help thousands of business owners, serial entrepreneurs and investors build a tax strategy that keeps their businesses thriving in Texas. The Texas Franchise Tax is a big part of that. Once our clients understand their obligation, as a leading Austin CPA firm, we help them make decisions all year long that reduce that burden, optimize exemptions and credits, and set them up for future business developments.
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