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Editorial 6 MIN READ

Texas franchise tax: the 2017 filing season review

A $1,110,000 threshold, a 0.75% headline rate, and a legislature that keeps promising to kill the whole thing

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What's actually due on May 15
  2. How we got the current rates
  3. Combined reporting, briefly
  4. What the 85th Legislature is doing about it
  5. The operational takeaway
  6. Sources

or reports due May 15, 2017, a Texas entity with $1,110,000 or less in annualized total revenue owes no franchise tax. It still has to file. That gap — between owing nothing and filing nothing — is where most of the Comptroller's 2017 enforcement energy is going to land.

The rest of the regime is the one HB 32 left behind two sessions ago: a 0.75% rate on general taxable margin, 0.375% on retail and wholesale, and a 0.331% EZ rate for entities under $20 million in total revenue. The rates held for 2017 reports. The 85th Legislature, gaveling in this January, is again debating whether the tax should exist at all.

What's actually due on May 15

Every taxable entity formed in Texas, or doing business in Texas, owes an annual franchise tax report. The due date for the 2017 report is May 15, 2017, a Monday. The tax is imposed under Chapter 171 of the Tex. Tax Code, and it reaches corporations, LLCs, limited partnerships, professional associations, business trusts, and most other limited- liability vehicles. Sole proprietorships and general partnerships of natural persons are outside it.

There are three filing tracks, and the track you land on depends almost entirely on revenue.

If your entity's annualized total revenue is at or below $1,110,000, you file Form 05-163, the No Tax Due Report. You owe zero. You still must file — and you must also file the associated Public Information Report (Form 05-102, for corporations, LLCs, and PLLCs) or Ownership Information Report (Form 05-167, for partnerships and trusts). Missing the PIR is the most common reason a compliant small entity shows up as delinquent on the Comptroller's rolls.

If your entity is above the no-tax-due threshold but has $20 million or less in annualized total revenue, you can elect the EZ computation on Form 05-169. The rate is 0.331% of total revenue, with no margin deductions. The trade is simplicity for giving up the 70%-of-revenue cap and the cost-of-goods-sold or compensation subtractions.

If you don't qualify for the EZ form or choose not to use it, you file the long form — Form 05-158-A and 05-158-B — and compute taxable margin the hard way. Margin is the least of four figures: total revenue minus cost of goods sold, total revenue minus compensation, total revenue minus $1 million, or 70% of total revenue. You then apply the appropriate rate: 0.375% if the entity is primarily engaged in retail or wholesale trade, 0.75% otherwise.

The compensation deduction for 2017 reports is capped at $360,000 per person under 34 Tex. Admin. Code § 3.589. That ceiling, adjusted biennially, is the same figure that applied in 2016. It goes up to $370,000 for reports originally due in 2018.

How we got the current rates

The rate schedule in force for 2017 is the one HB 32 locked in during the 84th Legislature. Before that bill, the general rate was 1.0% and the retail/wholesale rate 0.5%, with the EZ rate at 0.575%. HB 32, signed in 2015 and effective for reports originally due on or after January 1, 2016, cut each of those figures by about a quarter: 1.0% to 0.75%, 0.5% to 0.375%, and 0.575% to 0.331%. The EZ eligibility threshold was also raised from $10 million to $20 million in total revenue. The Legislative Budget Board scored the package at roughly $2.56 billion in business tax relief over the 2016–2017 biennium.

For 2017 filers, the practical effect is that the rate card has been steady for two reporting cycles. Planners who were modeling a 1.0% margin tax as recently as 2015 are now running 0.75% — a 25% cut to the per-dollar burden for entities that are above the threshold and outside the EZ band.

Combined reporting, briefly

Texas requires combined reporting for affiliated groups engaged in a unitary business, under Tex. Tax Code § 171.1014. The combined group is treated as a single taxable entity for purposes of the $1,110,000 threshold, the rate, and the $1 million margin subtraction. A holding company with a dozen Texas-doing-business subsidiaries doesn't get twelve thresholds; it gets one.

Two carve-outs matter. A member that conducts business outside the United States and assigns 80% or more of its property and payroll outside the country is excluded from the combined group. A member with no property or payroll is excluded if 80% or more of its gross receipts under Sections 171.103, 171.105, and 171.1055 are assigned outside the United States. Members of a combined group must use the same margin method — all COGS, all compensation, all 70%, or all $1 million. Choosing per-entity is not allowed.

This is where combined returns eat weeks of CPA time in March and April. The mechanics of identifying the unitary business, eliminating intercompany revenue, and confirming every member's method match are not the kind of thing you pick up from the form instructions alone.

What the 85th Legislature is doing about it

The Texas Legislature gavels in biennially, and the 2017 session opened on January 10. Two vehicles to kill or shrink the franchise tax are under active debate.

HB 28, filed by Rep. Dennis Bonnen, proposes to phase the tax out by directing future state revenue growth toward rate reductions; its mechanism is a contingent schedule rather than an immediate cut. SB 17 carries a parallel approach on the Senate side and passed the Senate on March 21 on a 22–8 vote. Both bills tie rate reductions to revenue triggers that would not bite until 2020 at the earliest, which is why neither one affects a report filed this May. Whether either vehicle survives conference is unresolved as of late March. Comptroller revenue estimates for the current biennium, which are tighter than the pre-oil-bust 2015 numbers that funded HB 32, are the binding constraint.

Readers should not plan around either bill. The 2017 report is filed under current law, and current law is HB 32.

The operational takeaway

For the May 15 deadline, three practical points cover most of the population. First, if you are under the $1,110,000 threshold, file the No Tax Due Report and the information report on the same day; skipping the second is the most common compliance failure. Second, if you are between the threshold and $20 million, model both the EZ rate and the long-form margin before you pick — for low-margin service businesses with real payroll, the compensation subtraction on the long form usually beats EZ, and for businesses running near 70% margin the long form beats EZ by wider margins still. Third, if you are in a combined group, start the intercompany-elimination work now, because the Texas filing and the federal return are frequently on the same CPA's desk in the same week.

The franchise tax's critics have been predicting its death every session since its 2008 enactment. It has been cut, restructured, and never repealed. A Texas entity planning for 2018 should budget as if the current rate card holds — and be pleasantly surprised if the 85th Legislature does something different.

Sources

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