Frequently Asked Questions
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- Staff Leasing Companies
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Note: TTC means Texas Tax Code and IRC means Internal Revenue Code
Reports and Payments
- 1. What is franchise tax?
- The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas. (Updated 09/21/09)
- 2. Do all entities have to file franchise tax reports?
- All taxable entities must file franchise tax reports.
- 3. What is the revised franchise tax base?
- Unless a taxable entity qualifies and elects to file using the E-Z Computation, the revised tax base is the taxable entity's margin. Margin equals the lowest of three calculations:
- total revenue minus cost of goods sold;
- total revenue minus compensation; or
- total revenue times 70 percent.
- 4. In regards to qualifying for the 0.5% tax rate, what does “primarily engaged in wholesale or retail trade” mean?
- A taxable entity is primarily engaged in retail or wholesale trade only if (1) the total revenue from its activities in retail or wholesale trade is greater than the total revenue from its activities in trades other than the retail and wholesale trade; and (2) less than 50% of the total revenue from activities in retail or wholesale trade comes from the sale of products it produces or products produced by an entity that is part of an affiliated group to which the taxable entity also belongs, except for those businesses under Major Group 58 (eating and drinking establishments); and (3) the taxable entity does not provide retail or wholesale utilities, including telecommunication services, electricity, or gas. For an example and more information, see STAR document 201004006L, entitled Determining If an Entity is Eligible for the 0.5 Percent Rate, on our website.
Note: A product is not considered to be produced if modifications made to the acquired product do not increase its sales price by more than 10%. For an example of this rule, see STAR document 201001011L, entitled Clarification of Certain Eligibility Requirements for the 0.5 Percent Tax Rate, on the our website.
- 5. How is retail trade defined?
- Retail trade means the activities described in Division G of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget. TTC 171.0001(12).
- 6. How is wholesale trade defined?
- Wholesale trade means the activities described in Division F of the 1987 Standard Industrial Classification Manual published by the federal Office of Management and Budget. TTC 171.0001(18).
- 7. Where can taxpayers find their SIC code and why is it required on the forms?
- SIC codes are online at the OSHA (Occupational Safety and Health Administration) Web site. In the “enter the search keyword” box, enter the word or words that best describe your business, and click “submit.” The search will return the classification choices for you to select the best match for your business.
The statute specifies that a tax rate of 0.5% be applied to taxable entities primarily engaged in wholesale or retail trade as described in Division F and Division G of the 1987 Standard Industrial Classification (SIC) Manual. The Comptroller's office uses the SIC code to verify that the appropriate tax rate was used.(Updated 09/21/09)
- 8. What is a NAICS code and why is it required on the forms?
- The North American Industry Classification System (NAICS) was developed jointly by the United States, Canada and Mexico to provide new comparability about business activity in North America. States must use NAICS codes instead of the Standard Industrial Classification (SIC) codes when reporting data to the federal government.
The Comptroller's office uses the data to help us estimate revenue, to answer requests from the legislature and the public about taxable sales by industry, and to provide taxpayers specific information about changes in the tax laws that might affect a particular industry.NAICS codes are online at the U.S. Census Bureau's Web site. In the “enter keyword” box for the 2007 NAICS search, enter the word or words that best describe your business, and click on “2007 NAICS Search.” The search will return the classification choices for you to select the best match for your business. (Updated 8/26/08)
- 9. What does an entity file if it is ending its existence or no longer has nexus?
- An entity ending its existence that is not part of a combined group must file its annual report for the current privilege period, a final report, and the appropriate information report - a Public Information Report (05-102) for corporations, LLCs and financial institutions or an Ownership Information Report (05-167) for other entities. If the entity is a member of a combined group, see FAQ #21 under Combined Reporting. (Updated 09/21/09)
- 10. What accounting period ending date was used for filing the initial franchise tax report?
- Taxable entities that became subject to the franchise tax before October 4, 2009 were required to file an initial franchise tax report that used the last accounting period end date for federal purposes that was at least 60 days before the original due date of the initial report. An initial report was due one year and 89 days after the entity was organized in Texas or the date a non-Texas entity began doing business in Texas. Some reporting requirements for filing a taxable entity's first franchise tax report have changed. See FAQ #27 for reporting, due date, accounting, and privilege period information for taxable entities that became subject to the franchise tax on or after October 4, 2009. (Updated 01/03/12)
- 11. How does a taxable entity make an election for cost of goods sold or compensation?
- Taxable entities must elect whether to deduct cost of goods sold or compensation when determining taxable margin. If no election is made, the taxable entity's margin will be 70% of total revenue. Taxpayers filing the long form report will make the election simply by filing the report using one method or the other. No other action is required.
Taxpayers filing the E-Z Computation report will not make this election since neither COGS nor compensation may be deducted. In addition, taxpayers filing the No Tax Due report will not make the election. (Updated 06/13/12)
- 12. If tax due is more than $1,000, but annualized total revenue is less than the no-tax-due threshold amount, do I owe the tax?
- A taxable entity will owe no tax if the total tax due is less than $1,000, OR the entity's annualized total revenue is less than the no-tax-due threshold amount. (See FAQ #32 for the no-tax-due threshold amounts for each report year.) The reporting requirements, however, are different for each scenario.
- If annualized total revenue is less than the no-tax-due threshold amount, then the taxable entity files a No Tax Due Information Report (Form 05-163).
- If the tax due is less than $1,000, but annualized total revenue is greater than the no-tax-due threshold amount, then a No Tax Due Information Report cannot be filed. A franchise tax report supporting the amount of tax due (Form 05-158 or 05-169) must be filed. Thus, when the amount of tax due shown on these forms is less than $1,000, the entity files the report but does not owe any tax.
The filing in each of the above scenarios must include the appropriate information report (Form 05-102 or 05-167) based on its entity type. For entities electing to report using the tiered partnership provision, see FAQ#3 and other information under Tiered Partnership Provisions for their no-tax-due qualification requirements. (Updated 01/03/12)
- 13. What is the E-Z Computation and who is eligible for it?
- A taxable entity with total revenue of $10 million or less, annualized per 12- month period on which the tax is based, may elect to pay the franchise tax by multiplying total revenue times the apportionment factor times a tax rate of 0.575% (.00575). A taxable entity that elects to use the E-Z computation is not eligible for the COGS or the compensation deduction and may not claim any credits. TTC 171.1016. For franchise tax reports originally due on or after January 1, 2008 and before January 1, 2010 an E-Z computation filer may still qualify for the discount from tax liability (See FAQ #15) (Updated 09/18/09)
- 14. What is the discount from tax liability?
- For franchise tax reports originally due on or after January 1, 2010, there are no discounts available because the no-tax-due threshold amount exceeds the discount threshold.
For franchise tax reports originally due on or after January 1, 2008 and before January 1, 2010, a discount from tax liability is available for businesses with less than $900,000 in total revenue, annualized per 12 month period on which the tax is based. When the accounting period upon which the franchise tax report is based is more or less than 12 months, a taxable entity must annualize its total revenue to determine its discount percentage. The discount, which reduces the amount of tax due, is a percentage of the calculated tax due. The discount percentages, based on total revenue, are:
80% of tax due for total revenue greater than $300,000 and less than $400,000;(Updated 12/03/13)
60% of tax due for total revenue greater than or equal to $400,000 and less than $500,000;
40% of tax due for total revenue greater than or equal to $500,000 and less than $700,000;
20% of tax due for total revenue greater than or equal to $700,000 and less than $900,000.
- 15. Is the discount percentage based on apportioned revenue?
- No, the discount percentage is based on total revenue, annualized per 12 month period on which the report is based, as defined under TTC 171.1011. (Updated 03/18/08)
- 16. What are the criteria for filing no-tax-due reports?
- A taxable entity, including a combined group, qualifies to file a No Tax Due Information Report (Form 05-163) if it meets one of the criteria below:
- has zero Texas receipts,
- qualifies as a passive entity under TTC 171.0003,
- is a real estate investment trust (REIT) that meets the qualifications specified in TTC 171.0002(c)(4), or
- has total revenue, annualized per 12-month period on which the tax is based, below the no-tax-due threshold amount, which is $1,080,000 for the 2014 and 2015 report years. See FAQ #32 for current and prior year no-tax-due threshold amounts.
- 17. Are quarterly estimated payments required?
- No, quarterly estimated payments are not required for the revised franchise tax.
- 18. Do I need to send a copy of my federal return?
- No, do not send copies of your federal return.
- 19. If the accounting period on my franchise tax report is not 12 months, how do I annualize total revenue to determine my eligibility for the no-tax-due threshold, discounts on tax due that are based on total revenue and qualification for the E-Z computation?
- When the accounting period upon which the franchise tax report is based is more or less than 12 months, a taxable entity must annualize its total revenue to determine its eligibility for the no-tax-due threshold, discounts on tax due based on total revenue amounts less than $900,000 and qualification for the E-Z computation. To annualize total revenue, an entity will divide total revenue by the number of days in the period upon which the report is based, then multiply the result by 365. (See FAQ #32 for the no-tax-due thresholds, which are based on the report year, and FAQ #14 for a discussion of discounts.)
A taxable entity's 2014 franchise tax report is based on the period 09-15-2013 through 12-31-2013 (108 days), and its total revenue for the period is $350,000. The taxable entity's annualized revenue is $1,182,870 ($350,000 divided by 108 days multiplied by 365 days.). Because its annualized revenue is not less than the $1,080,000 no-tax-due threshold, the taxable entity does not qualify to file a No Tax Due Information Report. It is eligible to file using the E-Z computation. For report year 2014, discounts do not apply.
- 20. Is the information I report on the Ownership Information Report public information?
- No. Tax Code Section 171.206 says "…the following information is confidential and may not be made open to public inspection: 1) information that is obtained from a record or other instrument that is required by this chapter to be filed with the comptroller." We believe this provision makes the information on the Ownership Information Report confidential. (Updated 05/05/08)
- 21. What if entities filed separate reports and later determine they should have filed a combined report?
- The entity that filed incorrectly should submit a letter with its name and taxpayer number stating that the report was filed in error and the entity will report with a combined group. The letter must also include the name and taxpayer number of the combined group’s reporting entity along with a request for a refund or authorization to transfer any tax payment from the member's account to the reporting entity's account. (Updated 08/11/08)
- 22. Which entities file the Public Information Report, Form 05-102, and which entities file the Ownership Information Report, form 05-167?
- The Public Information Report (PIR) is filed for each taxable entity that is legally formed as a corporation, limited liability company or financial institution. Professional associations, partnerships, associations, trusts and all other taxable entities, except for corporations, limited liability companies and financial institutions, file the Ownership Information Report (OIR). A separate PIR or OIR must be submitted by each member of a combined group unless the member does not have nexus in Texas. (Updated 09/21/09)
- 23. How do I complete Section A on form 05-167 Ownership Information Report if I do not have limited or general partners?
- Professional associations should check the "OTHER" box and report the members of their executive committee.
- Trusts should report their trustee information and not check any box (PARTNER or OTHER).
- Associations should report information for the individuals who have authority to sign a contract on behalf of the association and not check any box (PARTNER or OTHER).
- All other entities should report their executive board members and check the "OTHER" box.
- 24. When reporting individuals on the form 05-167 Ownership Information Report do I report the social security number if they do not have a FEI number?
- No, the social security number should not be reported on form 05-167 Ownership Information Report. (Updated 08/15/08)
- 25. May I leave the registered agent’s information blank if I do not have one?
- No. Section 171.354 states each taxable entity on which a tax is imposed by this chapter shall designate a resident of this state as the taxable entity's agent for the service of process. (Updated 08/15/08)
- 26. When can I amend my franchise tax report?
- An amended report may be filed
- to correct a mathematical or other error in a report;
- to support a claim for refund;
- to change the method of computing margin; or
- to make an election to use the COGS or the compensation deduction.
Note that taxpayers that elected to use the E-Z computation report or filed the no tax due information report may amend to the long form and make an election to use the COGS or the compensation deduction. An amended report that results in a reduction of tax liability is a request for refund and must meet refund requirements.
- 27. When is a newly taxable entity's first report due?
- A taxable entity first subject to franchise tax on or after October 4, 2009, will file an annual report. They will not file an initial report.
A taxable entity, therefore, that becomes subject to franchise tax during calendar year 2013 will have a 2014 annual report due on 05/15/2014.
The privilege period covered by the first annual report will be from the date the entity becomes subject to franchise tax through December 31 of the following calendar year. For example, an entity becoming subject on 11/15/2013 will file a 2014 annual report due 05/15/2014 for the privilege period 11/15/2013 through 12/31/2014.
The accounting period covered by the first annual report will be based on the accounting period beginning on the date the entity becomes subject to franchise tax and ending on the last accounting period ending date used for federal income tax reporting purposes in the calendar year before the year the report is originally due. For example, for report year 2014, the accounting period ending date for an entity with a fiscal year end of September 30 will be 9/30/2013.
See FAQ #29 for a discussion of the situation when an entity's accounting year end date is prior to the date it becomes subject to the franchise tax.
- 28. What happens if my business closes down in its first year?
- To end its existence in its first year, an entity must satisfy franchise tax filing requirements prematurely. If the entity ceases business and has not had an accounting year end, the entity will file an annual franchise tax report (No Tax Due or EZ Computation, if qualified, or Long Form) and the appropriate Information Report, and pay any tax due.
If the entity is a fiscal year end taxpayer that ceases business after its normal accounting year end, it must file both an annual and a final report. The annual report will cover the period from its beginning date through the entity's normal accounting year end. The final report will cover the day after its normal year end through the last day the entity conducted business. Only one information report is due.In both cases, write the word PREMATURE across the top of the report(s). Include Form 05-359 to request a Certificate of Account Status. The entity must file this certificate as part of the termination filing to end the entity's existence with the Secretary of State. Entities not registered with the Secretary of State must notify our office in writing of the last day business was conducted. (updated 01/26/11)
- 29. What if the entity's normal accounting year end date is prior to the date it became responsible for franchise tax?
- If the entity's normal accounting year ending date is prior to the date the entity first became responsible for the tax, the first annual report filed will reflect a one-day accounting period (that is, the accounting year end date will be the same as the accounting year begin date).
For example, an entity became subject to the tax 10/05/2011. The entity's normal accounting year ending date is August 31. The entity cannot file with an 08/31/2011 accounting year end for the 2012 franchise tax report because 08/31/2011 is prior to the date the entity first became subject to the tax. In this case, the entity will file with a one-day accounting year beginning and ending date of 10/05/2011 for the privilege period 10/05/2011 through 12/31/2012. This will be a zero return. In 2013, the entity will file with an accounting period 10/05/2011 - 08/31/2012 for the privilege period ending 12/31/2013.
- 30. For 2014 and 2015 franchise tax reports, what is the effect of the increase in the Consumer Price Index (CPI) on the calculation of the no-tax-due threshold amount, discounts, and the compensation deduction?
- Beginning January 1, 2010, TTC Section 171.006 requires adjustments on January 1 of each even-numbered year to
(a) the no-tax-due threshold amount in TTC Section 171.002(d)(2);
(b) the total revenue levels for the tax discounts in TTC Section 171.0021; and
(c) the wage limitation per natural person in computing compensation in TTC Section 171.1013(c).
The adjustments are based on increases or decreases in the rate of the appropriate CPI. As a result, per 12-month period on which the margin is based, the no-tax-due threshold amount for 2014 and 2015 reports increases to $1,080,000 and the wage limitation per natural person on the wages and cash compensation increases to $350,000.
- 31. What's the best way to make a payment on the due date?
If you are not paying electronically, your payment will be considered timely if it is postmarked on or before the due date, or hand delivered to a local Comptroller's office during normal business hours on or before the due date.
If you are paying electronically using the Web EFT (Electronic Check) method in WebFile, you have until midnight (CT) on the due date for your payment to be considered timely.
If you are paying electronically using TEXNET, see “What if I've missed my TEXNET payment deadline and I want to wire my payment on the due date?”
Wire transfer is not an option if you are not enrolled in TEXNET. (added 05/11/10)
- 32. How much is the No-Tax-Due Threshold Amount?
- The amount of the no-tax-due threshold, per 12-month period on which the margin is based, is outlined below:
- $1.080,000 for franchise tax reports originally due on or after January 1, 2014 amd before January 1, 2015. (Note: The no-tax-due threshold of $1,000,000 has been adjusted for the increase in the Consumer Price Index (CPI) as required by TTC Section 171.006. See FAQ #30.)
- $1,030,000 for franchise tax reports originally due on or after January 1, 2012 and before January 1, 2014.
- $1,000,000 for franchise tax reports originally due on or after January 1, 2010 and before January 1, 2012.
- $300,000 for franchise tax reports originally due on or after January 1, 2008 and before January 1, 2010.