Texas Corporate Tax Return: Everything You Need to Know
Texas corporate tax return includes state-level income tax and franchise, or margin, tax for most businesses.3 min read
Texas corporate tax return includes state-level income tax and franchise, or margin, tax for most businesses.
Texas State Business Income Tax
In most states, you are liable to pay tax to the state in which you conduct your business. Taxation of business income depends partly on the legal structure of the business.
Usually, corporations are liable to pay corporate income tax, whereas owners of pass-through businesses, like S corporations, LLCs, partnership firms, and sole proprietorship concerns, pay a state's tax on their personal income.
Corporate and personal income tax rates vary from state to state. Corporate tax rates are usually flat and range between four and nine percent, whereas personal tax rates are based upon income stabs and range between zero and nine percent.
Currently, the states of Washington, Wyoming, Nevada, and South Dakota do not tax income either at the corporate or personal level. There is no personal income tax in the states of Texas, Alaska, and Florida. The states of Tennessee and New Hampshire tax individuals only on their income from interest and dividends.
Texas Franchise Tax
In addition to corporate and personal income taxes, several states levy a franchise, or "privilege," tax for allowing you to do business in the state. Just like the state income tax, the franchise tax also depends on the structure of your business. It is charged either at a flat rate or is based on the net worth of your business.
Texas levies a franchise tax, or a “margin tax,” on most of the businesses, except for sole proprietorship concerns and some types of general partnerships. Since there is no personal income tax in Texas, you need not pay any further taxes to the state on the income you receive from your pass-through business entity after it pays the franchise tax.
The rate of franchise tax in Texas is one percent for most of the businesses. However, for wholesale and retail businesses, it's only 0.5 percent. If the total revenue of your business is under $10 million and you choose to use the E-Z Computation, then the rate of franchise tax would be 0.575 percent.
The franchise tax is charged on the amount of “taxable margin,” which is computed as the least of the following amounts:
- 70 percent of revenue
- Amount left after deducting the cost of goods sold from total revenue
- Amount left after deducting compensation from total revenue
There is no minimum amount of franchise tax that you need to pay. Moreover, if the total tax due for your business is under $1,000 or the annual revenue of your business does not cross the no-tax-due threshold, then you need not pay any franchise tax.
Texas Franchise Tax Returns
You must file franchise tax returns by May 15 every year. You may request to extend this deadline to Nov. 15.
If you are an EFT taxpayer and paid $10,000 or more in taxes in any of the previous years, then the due date for filing franchise tax return is automatically extended to Aug. 15. You can request a second extension to postpone the due date to Nov. 15. You must file a return even if there is no tax due.
The request for second extension cannot be filed online without making a payment. So, you can either go for paper filing or file online with a balance of $1.
If you follow the fiscal year, you may find Texas franchise returns and the filing due dates to be confusing. The accounting period for you would be same as your federal income tax period applicable for the calendar year just before the year in which the franchise return is due.
For example, if your fiscal year ends on March 31, 2016, you would be filing a 2015 income tax return to the IRS based upon the transactions of the year ending on March 31, 2016. This information will go into your 2017 Texas franchise return, due on May 15, 2017.
Thus, for fiscal-year taxpayers, the accounting period for Texas franchise return would be two years after the federal tax return year. It's important to use the correct accounting period since filing a franchise report for the wrong year would result in wastage of time and efforts.
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