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In an effort to better spread the tax burden amongst those doing business in the State of Texas, the Legislature has adopted a system vastly different from the franchise tax to which we had been accustomed. Virtually all legal entities will be subject to reporting, related companies will require combined returns, and sustaining an operational loss will not ensure the result of zero margin tax.

Here are some key items to retain when it comes to Texas Margin Tax compliance:

  • The entities exempt from this taxation are sole proprietorships, general partnerships (those where all owners are natural persons), grantor trusts, and passive entities.  Passive entities must be organized as a general partnership, limited partnership, or trust, and have a minimum of 90% of their gross income from sources such as interest, dividends, royalties, and capital gains.

  • The tax rate is 1% for most entities. Retailers and wholesalers (as defined by the SIC code on their federal return) incur a rate half that of others.

  • The larger of cost of goods sold, compensation, or 30% of revenue is deducted from revenue to arrive at taxable margin. Cost of goods sold will most likely match that reported on the entity’s federal return. Employer paid benefits such as health insurance and retirement plan contributions (but not payroll taxes) will be added to wages to arrive at compensation for margin tax purposes. Compensation can include net distributive income paid to natural persons, but compensation (including benefits) in any circumstance cannot exceed $300,000 per person. Taxable margin must be apportioned to business done in Texas.

  • Businesses with less than $10 million in total revenue can utilize an alternative computation. In this instance, apportioned revenue is multiplied by .575% to arrive at margin tax due.

  • Entities whose revenue is $300,000 or less in a year will not have to pay any tax. Note that the exemption does not apply at the individual member level in the case of a combined group. If revenue is under $900,000, a sliding scale discount will apply. Beginning in 2010, these thresholds will be indexed biennially for inflation.

  • Effective for franchise tax reports originally due on or after January 1, 2010: Entities whose revenue is $1,000,000 or less in a year will not have to pay any tax. The amount changes to $600,000 or less for reports originally due after 2012.

Detailed definitions and tax calculation worksheets are available at this State Comptroller’s website link. We are happy to address your individual situation in order to capture all potential deductions related to Texas Margin Tax and properly submit your return under these unique and complex rules.

 

 

 

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