Texas Margin Tax
Texas enacted the Texas Franchise (Margin) Tax through House Bill Three, which was enacted into law in May 2006. The first taxable period for this new tax law began on January 1, 2007 and the first returns were due in May of 2008. Consequently, the application of the Margin Tax to taxpayers is an on-going process. Taxpayers, such as businesses, are advised to seek the assistance of qualified, experienced tax law lawyers to ensure compliance with this relatively new tax law.
Entities are affected by the Margin Tax
The Texas Administrative Code Rule 3.581 provides information regarding the taxable and non-taxable entities under the Margin Tax. The list of taxable entities includes the following types or organizations:
- Partnerships
- Corporations
- Banking corporations
- Savings and loan associations
- Limited liability companies (such as single member limited liability companies that are disregarded for federal income tax purposes)
- Business trusts
- Professional associations
- Business associations
- Joint ventures
- Joint stock companies
- Holding companies
- Combined groups
- Other legal entities
The following entities are generally considered exempt from the Margin Tax:
- Sole proprietorships
- General partnerships (only if every partner is a natural person)
- Passive entities: must be either a general partnership, limited partnership or trust (other than a business trust) and meet several specific requirements under the code
Seek the advice of knowledgeable tax counsel to determine how you or your businesses are categorized under this Margin Tax.
Margin Tax Calculation
The tax base for the Margin Tax is an entity's margin. Margin equals the lesser of any of the three following calculations:
- Total revenue minus cost of goods sold
- Total revenue minus compensation
- Total revenue times 70 percent
The taxable margin is based on the percentage of an entity's business done in Texas.
Discounts to the Margin Tax
A taxable entity may be entitled to a discount if a tax professional determines that one of the following applies:
- Total revenue is greater than $300,000 and less than $400,000 (80 percent tax discount applies)
- Total revenue is greater than or equal to $400,000 and less than $500,000 (60 percent tax discount applies)
- Total revenue is greater than or equal to $500,000 and less than $700,000 (40 percent tax discount applies)
- Total revenue is greater than or equal to $700,000 and less than $900,000 (20 percent discount applies)
Seek Experienced Legal Advice
The Texas Comptroller of Public Accounts website provides an overview of Texas tax law and specific information regarding the Margin Tax. State tax laws are also accessible through the Texas Comptroller website.
To consult with experienced tax attorneys regarding the impact of the Texas Margin Tax on your business, or concerning any other tax matter, contact Wigington & Dankesreiter, L.L..
