Who is subject to the new Texas margin tax?

• Author: Trahan, Robert L.

In May 2008, most taxpayers doing business in Texas will face the reality of a new franchise tax regime--the margin tax (2006 TX H.B. 3). The new law requires that taxpayers doing business in Texas. must pay a franchise tax based on their taxable margin. Naturally, when the legislation was first passed, CPAs, lawyers, and business owners examined this new law to understand it and to anticipate problems they and their clients might encounter. As with any new legislation, the community was quick to point out technical errors. In addition, the Texas constitution does not allow for a tax on net income; therefore, questions were raised about the constitutionality of the law itself.

The old law imposed a franchise tax only on corporations and limited liability companies (LLCs) conducting business in Texas. To dramatically reduce the tax, many companies restructured to a limited or general partnership. The intent of the new law is to impose a franchise tax on any entity conducting business in Texas that is afforded any type of limited liability, including limited partnerships (LPs) and limited liability partnerships (LLPs).

The new law is effective for reports due on or after January 1, 2008. This item briefly explores which types of entities are taxable and which are nontaxable, illustrates the basic calculation of the tax, and explains new concepts introduced by the new tax law, such as taxable margin, combined reporting, and passive entities.

Entities Subject to the Tax

Corporations and LLCs are still subject to the franchise tax; however, the new law specifically expanded the scope to include:

* Professional associations;

* Banking corporations;

* Savings and loan associations;

* LPs;

* LLPs;

* Business trusts;

* Joint ventures;

* Holding companies;

* Joint stock companies;

* Combined entities; and

* Other legal entities (TX Tax Code [section] 171.0002(a)).

On the other hand, entities not subject to the tax include:

* Sole proprietorships;

* General partnerships (100% owned by natural persons);

* Grantor trusts;

* Passive entities;

* Exempt entities specifically listed under Chapter 171, Subchapter B, of the Texas Tax Code;

* Estates of natural persons;

* Escrows;

* Real estate investment trusts or real estate mortgage conduits;

* Nonprofit self-insurance trusts; and

* Trusts qualified under Sec. 401 (a) (TX Tax Code [section][section] 171.0002(b) and (c)).

New Concepts

These lists contain many new terms not previously used in the Texas Tax...