Understanding Texas Franchise Tax And Filing Requirements

Filing franchise taxes is a key part of doing business in Texas, regulated by the Texas Comptroller of Public Accounts. This privilege tax allows entities to contribute to public services, infrastructure, and state growth and is mandatory for most entity types.

Understanding your tax obligations is critical for maintaining good standing in the state and avoiding penalties. This article provides a breakdown of the process and key considerations for filing Texas franchise tax. We'll also cover how Harbor Compliance can simplify the filing process and help ensure compliance with Texas state regulations.

What Is Franchise Tax in Texas?

A franchise tax is a state tax imposed on taxable entities in Texas for doing business in the state. It's levied annually on businesses that make over $2.47 million in annual revenue. Entities making less than $2.47 million must file a Public Information Report or Ownership Information Report.

According to the Texas Comptroller, the franchise tax applies to the following types of entities:

• Corporations
• Nonprofit corporations
• LLCs
• Banks
• State-limited banking associations
• Savings and loan associations
• S corporations
• Professional corporations
• General, limited, and limited liability partnerships
• Trusts
• Professional associations
• Business associations
• Joint ventures

Meanwhile, sole proprietors, unincorporated passive entities, nonprofit self-insurance trusts, and other similar parties are not subject to franchise tax.

How Is Texas Franchise Tax Calculated?

One approach to calculating Texas franchise tax is to file the EZ computation method, which doesn't consider the margin and instead applies to the total revenue. Ideally, you should opt for this tax calculation method if your total annual revenue is $20 million or less and you own:

• A passive entity that earns through passive sources, such as investments, royalties, rents, or interest.
• A Real Estate Investment Trust (REIT).
• A taxable entity with zero Texas gross receipts.

In other cases, the franchise tax is calculated on the margin of taxable entities in one of the following four ways:

1. 70% of total revenue
2. Total revenue minus the cost of goods sold (COGS)
3. Total revenue minus compensation
4. Total revenue reduced by $1 million

You can use the online franchise tax calculator to calculate the taxable margin on a separate entity basis.

How To File Franchise Tax in Texas

The filing process is divided into two categories based on the annual revenue a business generates:

1. Businesses earning between $2.47 million and $20 million must file an EZ computation report.
2. Businesses earning more than $20 million must file the Long Form Report.

The information you need to fill in both these forms is very similar, but the Long Form Report is more extensive.

1. Filing an EZ Computation Report

The EZ Computation Form is a single-page form that requires details about a business's revenue only. Here's how to file the report:

1. Enter your taxpayer number and contact details.
2. Fill out details about your revenue, including gross receipts, dividends, interests, rents, royalties, total revenue, tax due, discount, etc.
3. Include the tax payment with the form if the total tax due is greater than $1,000.
4. Mail it to the Texas Comptroller of Public Accounts.

2. Filing a Long Form Report

The Long Form filing application is a two-page form that requests details about a business's revenue, compensation, margin, apportionment factor, taxable margin, and taxes. File using the below steps:

1. Enter your taxpayer number and contact details.
2. Fill out the details about your revenue, including gross receipts, dividends, interests, gains/losses, etc.
3. Enter details about the cost of goods sold.
4. Input information about your company's compensation, such as wages and cash compensation, employee benefits, etc.
5. Fill out details about margin, taxable margin, tax rate, and tax adjustments.
6. Include the tax payment with the form if the total tax due is greater than $1,000.
7. Mail it to the Texas Comptroller of Public Accounts.

The Importance of Timely and Accurate Franchise Tax Filing

Franchise tax reporting in Texas comes with detailed requirements and strict deadlines. The annual filings are due every year on May 15, and missing this deadline can lead to steep penalties. With the state's penalties ranging from 5% to 10% of the unpaid amount, plus interest, noncompliance can have serious financial consequences.

The complexity increases with varying tax rates—0.375% for retailers/wholesalers and 0.75% for other businesses—and choosing the correct margin calculation method. Mistakes like miscalculating margins or improperly claiming exemptions may result in audits or compliance issues.

This is where a trusted service provider like Harbor Compliance can make all the difference. With tools like our Entity Manager, we streamline organizational tasks, such as maintaining corporate records, managing tax filings, and tracking deadlines, ensuring accuracy, timeliness, and adherence to state laws.

Trust Harbor Compliance for Navigating Tax Obligations

Our advanced Software Suite simplifies Texas franchise tax filings by ensuring your registrations, filings, and renewals are efficiently managed. One of the key modules within our suite, Entity Manager, seamlessly integrates with secretary of state databases to make compliance easier and more efficient.

Here are some of the benefits you get from using our Entity Management module:

• Comprehensive entity overview—This tool provides a centralized, up-to-date view of your entity's key details, including registration numbers, compliance status, and other publicly accessible information. It helps ensure you're always aware of your business's standing.
• Efficient deadline tracking—Leveraging Compliance Core™, Entity Manager automatically tracks critical deadlines like annual report filings. Forget about the hassle of spreadsheets—our system keeps you on track with real-time reminders and updates.
• Multistate capability—If your business operates across multiple states, Entity Manager offers unmatched convenience. You can manage all your entities in various jurisdictions from a single dashboard, streamlining your operations and saving time.

How To Order Our Entity Management Module

To get started with our Entity Manager, follow these steps:

1. Visit the Entity Manager page.
2. Click on Schedule a Demo.
3. Select the date and time that best fits your availability and enter your details.

Additional Harbor Compliance Services

In addition to our proprietary Software Suite, Harbor Compliance offers a range of other services to help businesses with tax and licensing obligations. Find the details in the table below:

Simplify Texas Franchise Tax Filing With Harbor Compliance's Help

Texas has numerous requirements for filing franchise tax, but we can help you navigate the process with ease. With Harbor Compliance, you don’t have to worry about missing deadlines and facing penalties—we can help you stay on top of your franchise tax filings and due dates.

Have our Entity Manager handle the registrations and renewals for you and send you timely reminders for tax return filings—schedule a demo of our software now!

Need to learn about your current standing with the state? Check out the FREE Harbor Compliance Score™ and get a comprehensive evaluation. You can also reach out to us to browse and try our other comprehensive solutions.

Need more information? Contact us for personalized assistance, or visit our Information Center.