A lot of people are finding it a major challenge to understand the franchise tax in Texas, especially new business owners. The good news is that all they need is patience and the right guidance, and they can scale through the process without any issues. This blog post delves into all the important information and guidelines of the Texas franchise tax system. From filing requirements to tax rates and payment methods.
What is the Texas Franchise Tax?
The Texas Franchise Tax is an annual business privilege tax processed by the Texas Comptroller of Public Accounts. Essentially, it’s a tax levied on business owners in exchange for the opportunity to do business in Texas. This means that if your business operates within Texas, you are required to pay this tax.
Who is subject to the franchise tax?
To take into account once a business is situated in Texas it is subjected to the franchise tax. The nature of the business doesn’t matter whether it is a profit or non-profit organization, limited liability companies (LLCs), corporations, or other legal business entities.
What Constitutes a Taxable Entity?
A taxable entity is any business that is in Texas and therefore required to pay tax. This includes a limited liability company with one member that files federal income tax returns as a sole proprietor or businesses that have a form of presence in Texas, such as sales or services.
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Filing Report for Franchise Tax in Texas
Every business in Texas is required to file a franchise tax report. Every year, beginning the year after your registration or form submission, the Texas Franchise Tax Report is due on May 15. If the 15th happens to be a weekend, then the next business day will be the deadline.
New Filing Requirements for 2024
The no-tax-due threshold is raised to $2,470,000 for reports that were initially due on or after January 1, 2024. Entities that have annualized total revenue from their entire company that is less than or equal to that amount are exempt from filing a no-tax due report, and certain filing requirements are eliminated.
Electronic Filing and Payment
Texas taxpayers may be required to electronically report (file) and/or pay, depending on the amount reported and paid in the previous state fiscal year (September 1 to August 31). For instance, you must submit electronically if your sales/use tax payment is $50,000 or more.
All “No Tax Due” reports due after January 1, 2016, must be filed electronically.
Electronic payment is required.
You must use TEXNET to transmit payments if you paid $500,001 or more. You also need to pay electronically if you paid franchise tax or sales/use tax in an amount greater than $10,000.
Franchise Tax Rates, Thresholds, and Deduction Limits
Each reporting year has different rates, thresholds, and deduction restrictions for Texas franchise taxes. The rate that applies to the year for which you are submitting should be used.
Here’s a brief overview of the tax rates, thresholds, and deduction limits for 2024 and 2025:
- No Tax Due Threshold: $2,470,000
- Tax Rate (retail or wholesale): 0.375%
- Tax Rate (other than retail or wholesale): 0.75%
- Compensation Deduction Limit: $450,000
- EZ Computation Total Revenue Threshold: $20 million
- EZ Computation Rate: 0.331%
Penalties and Interest
There are several different fees and penalties your business may be subject to if you fail to submit your Texas Franchise Tax Report by the deadline. Regardless of whether a business owes franchise tax, business owners are charged a $50 fee for submitting reports after the due date.
Additionally, if your business does owe a franchise tax payment and your payment is 1-30 days late, a fine will be assessed in the amount of 5% of your total tax due. For reports received more than 30 days past the deadline, the penalty jumps to 10%.
How to Pay Franchise Tax in Texas
There are many ways to pay franchise tax in Texas. TEXTNET payment system can be used or electronic payment can be made through Webfile or EDI
According to Texas law, payments made in a payment category during the previous state fiscal year (September 1 through August 31) must be made via the TEXNET Payment System for all taxpayers and licensees who paid a total of $500,000 or more.
Webfile is a secure online portal for filing and paying taxes in Texas. With Webfile, you can file your return early and post-date the electronic check payment by changing the payment effective date.
Electronic Data Interchange (EDI) is for businesses with a large number of outlets, leases, schedules, or authorities. You can do an electronic funds transfer from your bank with EDI.
Understanding the franchise tax in Texas is important for any business operating in the state. This article has provided an overview of what the tax is, who it applies to, and how to file and pay it. Remember, the most important thing is to stay on top of your filing deadlines to avoid penalties and interest.
If you have any questions about the franchise tax in Texas, it’s best to contact a tax professional. They can provide you with the most up-to-date and accurate information.
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