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There’s a cost for success in Texas: The Franchise Tax. If your business is experiencing or planning rapid growth, don’t be caught unprepared when you reach the threshold.

The Texas Comptroller considers the Texas Franchise Tax a “privilege” tax, meaning it’s imposed on taxable entities for the privilege of doing business in Texas. Unlike what the name seems to insinuate, it’s not a tax reserved for a McDonald’s location or other typical franchise-type business. It applies to nearly all types of businesses, regardless of how they operate or who owns them. This includes most corporations, S-corps, LLCs (including single-member LLCs), partnerships, and trusts. The Texas Comptroller lists the entities subject to franchise taxes here. It also doesn’t matter where your business is based. If you do business in Texas, you’re required to file a Texas Franchise Report to maintain your ”good” standing.

A Significant Threshold Jump

There is a No Tax Due threshold for annual revenue, which rose significantly in 2024 from $1.23 million to $2.47 million, which will be set through 2025. The Austin American-Statesman reports that the move eliminated annual franchise taxes for an estimated 67,000 businesses.

Don’t expect another jump in 2026, though. If you’re in growth mode, plan accordingly. The threshold changes every two years, but the shift is usually subtle. Before this significant jump, the threshold hadn’t increased significantly since 2010, when it rose from $300,000 to $1 million.

No More Reporting If Under the Threshold

Another welcome change in 2024 is the removal of required reporting for businesses that qualify for No Tax Due status. In the past, taxable entities were required to file a Franchise Tax Report (which could be No Tax Due, EZ Computation, or Long Form) as well as an Information Report (Public Information Report or Ownership Information Report). Now, only an Information Report is required each year for those under the threshold.

If You’re Approaching the Threshold

Keep an eye on your taxable margin, which is the basis for calculating the Franchise Tax in Texas. According to the Texas Comptroller, unless a taxable entity qualifies and chooses to file using the EZ Computation, the tax base is the taxable entity’s margin and is computed by either total revenue times 70%, total revenue minus the cost of goods sold (COGS), total revenue minus compensation, or total revenue minus $1 million.

You need to be sure that your total revenue is computed correctly. There are exclusions, including certain dividends, flow-through funds, and industry-specific exclusions to consider. COGS, compensation deductions, and gross receipts can also affect the margin.

And then there are the definitions of what you’re selling, how you’re selling, and where you’re selling it from, which can affect your Franchise Tax eligibility and rate. Your opinion may vary from the Texas Comptroller, as others have painfully learned. A prominent example is the “Sirius problem” that the state faced recently.

Sirius XM Radio, which produces satellite radio programming, had issues with the state’s application of its Franchise Tax, which was applied based on the receipts of the location of its Texas subscribers. According to Texas Tax Code, the Franchise Tax is calculated based on “receipts from…each service performed in the state.” None of the employees or equipment used to deliver its service to Texas customers is physically located in the state (so, technically, the service was not being performed in the state). Long story short, Sirius won its case.

About a decade earlier, another entertainment business—this one in the movie cinema space—complained about the Texas Comptroller’s definition of tangible personal property as it relates to the Franchise Tax. Specifically, is a movie shown in a movie theatre a tangible product or is it a service?

These cases offer cautionary tales for those above the threshold or approaching it to be very clear and deliberate about their business definitions. Neglecting to do so could result in unnecessary taxation. Add in any failure to file, pay, or report Franchise Taxes appropriately (in the eyes of the state), and you could face painful penalties or worse. Feel free to contact us with questions.

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