Post April 15th one of the most frequent questions I get is, “Aren’t you glad things have slowed down?” While 2016 was WCM’s busiest and most successful tax season in our history, my reply is not what most people expect.
We are blessed that in our 63rd year to be growing more rapidly than any other time in the firm’s storied past. We are excited with opportunities to serve many new clients while continuing to offer our long-standing relationships innovative solutions to challenges they face. Therefore, while the pace has changed a little, we are thrilled that things aren’t really slowing down!
The federal filing deadline of April 15th gets most of the headlines, but the State of Texas follows this up with a May 15th deadline for Texas Margin (Franchise) tax. Since its inception in 2008 the Franchise tax has been a source of controversy and confusion for business owners. I’ll leave the debates on the merits/details to the folks up in Austin, and instead answer the two questions most Texans need to know.
1. Do I need to file a Texas Franchise return?
o If you are a business owner, or have simply formed an entity for investment purposes the answer is more than likely, yes. The revised franchise tax applies to partnerships, corporations, LLCs, associations, joint ventures and most other legal entities.
o While sole proprietorships are not required to file a Franchise return, they are required to file if they are a single member LLC.
♣ In this situation the business may not have a federal tax return due, but does need to file a Franchise return.
♣ A similar scenario occurs when an individual forms a single member LLC to hold real estate, investments or management purposes. Again, no federal tax return for the entity, but it’s important that a Franchise return is filed.
To summarize, if you’ve gone through the process of forming an entity with the Texas Secretary of State you probably need to file a Texas Franchise return. Filing is required even if the entity had no activity within the year and you are required to file annually until you go through the formal process of “closing” the entity with a file filing.
2. I have to file, what amount of tax will I owe?
o For many that are required to file the forms indicate “no tax due,” thus the answer is “zero.” The fact that you’re to file, but do not owe any tax is a source or relief and confusion.
o I will avoid getting too detailed on how the margin tax is calculated, but the first question is “are my annual revenues in excess of $1,110,000?”
♣ If the answer is no, then you will more than likely just need to file one of the informational forms.
♣ If, yes, then you’ll need to use the compensation you’ve paid or cost of goods sold to determine if tax is owed.
The definitions and how the calculation works is something your CPA can explain in more detail, and exceptions for both passive and disregarded entities may be present.
Bottom line it’s important to be diligent to keep track of your required filings to avoid penalties for late and/or non-filing. If you have in the past, or plan to establish new entities with the State of Texas, keep track of all the documents you receive and make sure you either file or extend all your returns by May 15th. In the event your business is subject to the margin tax, a more in depth understanding is warranted and tax planning to minimize your liability is appropriate.