As soon as you hear the term ‘franchise tax,’ you might assume it only applies to franchised outlets in the USA. But this is far from the truth. In reality, the franchise tax is completely unrelated to franchises and applies to all businesses that operate in the state. Franchise tax might seem just like a sales tax, but they are completely different. A franchise tax is required to be paid by the business, whereas the end-user pays the sales tax.
A franchise tax, often referred to as a margin, privilege, or occupation tax, is imposed by several states, including Texas, California, Delaware, and New York. In contrast, Alaska, Florida, Nevada, and Wyoming are among the states that do not levy such a tax. This article clarifies the Texas franchise tax, detailing its requirements and identifying who is obligated to pay it. By the end, you will have a comprehensive understanding of this tax.
Understanding Taxes in Texas
Texas has continued to enjoy a general reputation of being a very business-friendly state in the USA. It provides all types of resources that are essential in the establishment of a successful business. It boasts world-class facilities and infrastructure to help a business develop. Also, its no state personal income tax policy makes it even more attractive to the business owners. This creates a perception of Texas as a low-tax or no-tax state. However, this can mislead those who overlook business tax obligations in Texas.
It is important to break the misconception that no personal income tax means no business taxes at all. Although individuals enjoy no personal income tax in Texas, businesses are still required to pay a variety of state and local taxes to run a business in Texas.
The types of taxes that a business might encounter in Texas include:
- Sales and use tax (widespread).
- Property taxes (significant for many businesses).
- Potentially industry-specific taxes or payroll taxes (like unemployment insurance).
The Texas franchise tax is a primary business tax in the state and is often misunderstood by businesses. It is applied to entities based on a calculated margin and allows a business to operate legally in Texas.
What Is the Texas Franchise Tax?
This tax can be best understood as a privilege tax. The type of tax imposed on taxable entities operating businesses in Texas is known as the Texas franchise tax. The name may lead one to believe that it is applied only to franchised enterprises, but in reality, all businesses are affected by it and are not limited to franchises.
The State of Texas imposes it on certain business entities for the privilege of doing business, existing, or having a state charter/certificate of authority. In the conventional sense, it is not a direct property tax or a net profit tax. It is one of the most significant business taxes in Texas that is required to be addressed by entities that meet specific criteria.
It’s important to recognize that the Texas franchise tax isn’t an income or sales tax. These serve different purposes within Texas’s tax system, and understanding their distinctions is crucial. Let’s take a closer look at how the franchise tax differs from these other taxes.
Not an Income Tax
In the traditional federal sense, Texas doesn’t have any sort of state personal income tax or corporate income tax. This means that the personal income and the income generated by a business are not taxed in Texas. Although the franchise tax is based on a form of financial margin, it operates differently from other types of taxes. A franchise tax can be due in the state even if the company has a net loss for accounting or federal income tax purposes. This is because the margin calculation for franchise taxes is different from other types of taxes in Texas.
Not a Sales Tax
The franchise tax isn’t like a sales tax. Sales tax is typically paid by the customer when they purchase certain goods or services, and businesses collect and remit it. On the other hand, a franchise tax is a type of direct tax that is imposed on the business itself. It is calculated based on its overall margin derived from its activities in Texas.
Who Needs to File and Pay the Texas Franchise Tax?
Taxable entities in Texas must file and pay the franchise tax. This includes corporations (C-corporations and S-corporations), LLCs, LLPs, limited partnerships, and other structured business entities that are formed or doing business in Texas.
Many entities are exempt from the Texas franchise tax. Sole proprietorships (unless organized as LLCs), unregistered general partnerships, and unincorporated political committees are among those exempt.
No Tax Due Threshold
According to Senate Bill 3, the no-tax-due threshold has been doubled from $1.23 million to $2.47 million. This has been effective from January 1, 2024. Companies that have an annualized revenue at or below $2.47 million may owe no franchise tax to the state. However, they are still obliged to file the Public Information Report. A report like the Public Information Report or the Ownership Information Report might be required to be filed even if no tax is due to the state.
Entities having no physical presence in Texas can also owe the state franchise tax. If they surpass Texas economic nexus thresholds (e.g., $500,000) in Texas-sourced gross receipts, then they owe the state the franchise tax. Remote sellers and marketplace facilitators may fall under this rule.
Texas Franchise Tax: Key Deadlines, Penalties & How to File
The standard Texas franchise tax due date typically falls on May 15 or the next business day. However, businesses can also request deadline extensions by submitting a request by the due date. The deadline to file the extension is November 15. Businesses should remember that the extension is an extension to file the tax and not an extension to pay the tax. They need to pay the tax by the original deadline.
Non-compliance with Texas franchise tax requirements may result in severe consequences for the business. Penalties for late filings can impact a business’s reputation and finances. If the filing or payment is late, a 5% charge is applied to the unpaid taxes, which may increase to 10% if the delay exceeds 30 days. An additional 10% penalty and an interest set by the Texas Comptroller is charged if the delay exceeds 60 days. Furthermore, the business can also lose its good standing with the state.
Businesses can file the Texas franchise tax either online through the Webfile system or by mailing the completed forms to the Texas Comptroller of Public Accounts. You can visit the Texas Comptroller’s official franchise tax page to access forms and get detailed guidance on Texas franchise tax rates. The franchise tax page can help you understand how to calculate the Texas franchise tax.
Need Texas Franchise Tax Assistance? IncParadise Can Provide Clarity
Now that we’ve covered the essentials of the Texas franchise tax, you might still have questions or need help navigating the details. Staying compliant is crucial to avoid penalties and keep your business in good standing. That’s where IncParadise comes in. We’re ready to provide the guidance and support you need to stay on track and stress-free. Don’t hesitate to reach out to IncParadise today—let us help you handle your Texas franchise tax with confidence.
