New developments in the Texas franchise tax.

• Author: Clark, Erik L.

On May 18, 2006, Texas governor Rick Perry signed legislation that completely revamped the Texas franchise tax law (2006 TX H.B. 3). Under the new law, many more entity types are now required to submit a franchise tax report. Most notably, most partnerships doing business in Texas must now file the report. Previously, partnerships did not have a filing requirement.

Another major change under the new law is the requirement that entities doing business in Texas are now subject to combined reporting, as opposed to the separate reporting filing method under the old law. (For more on the Texas franchise tax, see Chisholm, "Texas Comptroller Provides Rules on the Texas Franchise Tax," Tax Clinic, 39 The Tax Adviser 499 (August 2008).)

This item describes some of the unusual facets of the new law and some recent developments that practitioners should be aware of.

Revenue Below $434,782 Is Tax Free

There are four different situations in which taxable entities filing the Texas franchise tax report will owe no tax:

1. The entity is a passive entity as defined in Chapter 171 of the Texas Tax Code (TX Tax Code [section] 171.0003). Note: Rental income is not passive per the Texas Tax Code.

2. The entity has zero Texas gross receipts.

3. The entity has a tax due of less than $1,000 (TX Tax Code [section] 171.002(d)).

4. The entity has $434,782 or less in total revenue.

   As originally passed in 2006, the new Texas franchise tax law actually used an amount of $300,000 for item 4 above. Texas Tax Code [section] 171.002(d) continues to reflect the $300,000 amount. However, per a September 17, 2007, Texas state comptroller press release, this amount is actually $434,782. This unusual figure is a result of tax discounts made available by the June 17, 2007, technical corrections bill (2007 TX H.B. 3928) that amended the May 18, 2006, law.

   How exactly does a total revenue amount of $434,782 result in no tax due on a Texas franchise tax report? One method by which entities calculate franchise tax due under the new Texas franchise tax law is by multiplying total revenue by a rate of .575% (.00575) (TX Tax Code [section] 171.1016). Under this "E-Z computation" method, a total revenue amount of $434,782 will result in just under $2,500 tax due ($434,782 x .00575 = $2,499.9965). One of the provisions of the technical corrections bill was to allow entities with $900,000 or less in total revenue to experience at least some relief from the new margin tax (TX Tax Code [section] 171.0021). Under this provision, entities with total revenue greater than or equal to $400,000 and less than $500,000 are allowed a tax discount equal to 60% of the tax otherwise due.

   An entity with $434,782 in revenue can therefore further reduce its tax due by a discount of just under $1,500 ($2,499.9965 x .60 = $1,499.9979). The tax due after taking the discount is just under...