HB32 Changes The Texas Franchise Tax (In A Pro-Business Way!)
September 4, 2015 | By Caroline R. Fabacher
Law Schooled is a VW series that breaks down current law and legal developments into actionable information.
Who it concerns: Texas companies or companies doing business in Texas. If your business pays a franchise tax in Texas, listen up. Changes affect taxable entities organized or conducting business in Texas with total annual revenues greater than $1 million or with a computed tax liability of at least $1,000.
What to know: The changes reduce franchise tax calculation rates and expand the availability of E-Z Computation. These changes go into effect and apply only to franchise tax reports due on or after January 1, 2016. For most taxable entities, the franchise tax rate drops from 1% of taxable margin to 0.75%. For taxable entities primarily engaged in retail or wholesale trade, the franchise tax rate drops from 0.5% to 0.375%. Finally, eligibility for use of Section 171.1016’s E-Z Computation and Rate expands from businesses with no more than $10 million in total revenue to businesses with no more than $20 million in total revenue, and drops the associated tax calculation rate from 0.575% to 0.331%. Note that because these changes only affects reports due on or after January 1, late filings in 2016 of reports due in 2015 cannot use these newly reduced tax calculation rates.
Why it matters: As of January 1, 2016, the franchise tax rates drop, and your business’ compliance costs and overhead with them. These changes, which leave you more cash to invest back into your business, are yet another signal that Texas’ business climate is among the best in the nation. If you do business in Texas, you can expect more cash left over after taxes to invest back into your business; it is estimated that these tax cuts will provide nearly $1.3 billion in relief to Texas businesses in 2016. In addition, your business is likely to benefit in a more subtle, indirect way. The franchise tax is not just a drag to you and your business because of the obvious hit to your bottom line, but because the difficulty of actually complying with it has its own inherent costs. (The Tax Foundation ranks Texas as 39th in the nation for corporate tax complexity, but notes that if the state eliminated its franchise tax it would rank among the best in the nation.) The expansion of 171.1016’s applicability makes nearly 14,000 more businesses eligible to use E-Z computation. If your business does no more than $20 million in total revenue, you now have the option to pay the franchise tax under E-Z computation and rate provisions; the simplified calculation method will likely benefit your business by reducing compliance costs and, ultimately, your business’ overhead.
Posted in Franchise Taxes
Caroline is an associate at Vela Wood. She focuses her practice in the areas of entity formation, capital raises, corporate governance, and daily fantasy sports regulations. You can see Caroline’s attorney profile HERE.