What is the Corporate Tax Rate in Texas?
Texas is one of the few states that does not levy a corporate income tax. Instead the state places a 1% franchise tax on most entities with gross receipts over $1 million. This franchise tax is “a tax on the privilege of doing business in Texas.” Some qualifying retailers and wholesalers are eligible for a .5% franchise tax rate.
The 1% or .5% is levied against gross receipts after the highest of three items are subtracted: cost of goods sold, cost of compensation, or 30% of total revenues. The cost of goods sold includes raw materials and labor costs. Service companies are not eligible for the cost of goods sold deduction. Compensation is defined as the amount a company pays in salaries plus certain benefits. 30% of total revenues is an option for businesses that have little in compensation or cost of goods sold.
Entities that are exempt from the franchise tax in Texas are: sole proprietorships, general partnerships, passive entities, and unincorporated political committees. Registered entities that have less than $1 million in gross receipts will not be assessed a tax, but are still required to file the annual report. All other entities are liable for the franchise tax at either the general 1% rate of the qualified .5% rate.
Be sure not to confuse gross receipts with profits. Some new business owners mistakenly use the federal income tax rules and fail to file because their new business did nothing or did not make a profit. The franchise tax only concerns whether you are a taxable entity and whether you received any money while doing business in the state. It is not a tax on your income or profit, but a tax on any business done within the state.
Do you need to worry about the franchise tax? In short:
- Do you own a business?
- Is that business registered with the State of Texas?
- Does your business have gross receipts (roughly, sales) of over $1 million?
If you answered yes to each, then you will likely be assessed a franchise tax. Don’t forget, all registered entities in Texas must still file, even if not assessed a tax. The deadline for filing if May 15, every year.
The state provides a great franchise tax calculator to help in your business or tax planning: http://www.cpa.state.tx.us/taxinfo/taxforms/HB3Calc.pdf
Reidel Law Firm seeks to put Texas small businesses on the track to success. Our flat fee services can help you stay in compliance, contact us below for a free consultation.