Franchise Tax is a tax imposed on every taxable entity formed or doing business in Texas. If you formed an entity, you probably got a notice in the mail notifying you of your franchise tax responsibility and the due dates for such reports.
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Franchise Tax Requirements for Texas Series LLCs
A Texas Series LLC is a distinct type of limited liability company allowing for the creation of multiple series under a single umbrella LLC. Each series can have its own assets, members, and operations. Here are the key requirements:
- Filing as a Single Entity: Generally, a Series LLC files a single franchise tax report that includes all its series. This requires careful tracking of the financial activities of each series. This will depend on the number of EIN’s you have.
- Revenue Threshold: For 2024, if the total revenue of the Series LLC and all its series is $2,470,000 or less, the entity falls under the no-tax-due threshold.
For new entities, you most likely will not have any tax due. Business with less than $1,180,000 in annualized total revenue do not owe any franchise tax. However, businesses that do not owe franchise tax must still file a report with the Comptroller for the State of Texas showing that they do not owe any franchise tax. This report is due May 15 of every year.
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If you do have revenue in excess of the threshold, you will need to compute the amount that you owe in franchise tax to the state of Texas. For the time being, the rate of tax is between 0.375% and 0.75% for most taxable entities. For those primarily engaged in wholesale or retail trades, you will pay the low end of the taxable rate. To figure out the margin for your tax rate you would take the least of 1) the total revenue minus cost of goods sold, 2) total revenue minus compensation, 3) 70% of total revenue, or 4) total revenue minus $1million. Once you have figured your margin, you can apply the tax rate and find the total amount of Franchise Tax due. You can also use the online calculator on the website for the Texas Comptroller.
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Potential Exemptions or Deductions
Texas offers several exemptions and deductions to help reduce the franchise tax burden:
- No-Tax-Due Threshold: Entities with total revenue below $2,470,000 are exempt from paying the franchise tax but must still file a no-tax-due report annually by May 15.
- Cost of Goods Sold (COGS) Deduction: Deducting the cost of goods sold can lower taxable revenue significantly.
- Compensation Deduction: Alternatively, businesses can deduct employee compensation, including wages, benefits, and payroll taxes.
- Temporary Credit for Business Losses: Businesses with previous losses can apply for temporary credits to offset their tax liability.
Filing Process and Deadlines - All businesses, regardless of whether they owe franchise tax, must file an annual report with the State Comptroller’s Office. The key points to remember are:
- Annual Report: Even if no tax is due, a no-tax-due report must be filed.
- Deadline: The annual report is due by May 15 each year.
- Accuracy and Documentation: Ensure all information is correct, save a copy of your form, and meet the filing deadline to avoid penalties.
Filing Process and Deadlines
All businesses, regardless of whether they owe franchise tax, must file an annual report with the State Comptroller’s Office. The key points to remember are:
- Annual Report: Even if no tax is due, a no-tax-due report must be filed.
- Deadline: The annual report is due by May 15 each year.
- Accuracy and Documentation: Ensure all information is correct, save a copy of your form, and meet the filing deadline to avoid penalties.
For San Antonio Small Businesses, the Franchise Tax can be a very simple process and should be easily handled by your business’s Accountant. If you decide to do it on your own, make sure you enter the correct information, save a copy of your form, and meet the deadline to file with the State Comptroller’s Office.
Common Challenges or Mistakes
Navigating franchise tax can be tricky, and common pitfalls include:
- Incorrect Revenue Classification: Misclassifying revenue can lead to incorrect tax payments.
- Neglecting to File Reports: Even businesses owing no tax must file annual reports. Failure to do so can result in penalties.
- Improper Deductions: Misapplying deductions, such as those for COGS or compensation, can lead to audits and penalties.
Tax Planning Strategies
Effective tax planning can minimize your franchise tax liability legally. Here are some strategies:
- Proper Record-Keeping: Maintain detailed records of all transactions, expenses, and revenues. This ensures accurate reporting and substantiation of deductions.
- Timing of Expenses and Revenue Recognition: Strategically timing revenue and expense recognition can influence taxable revenue. For example, deferring income to the next tax year or accelerating deductible expenses can be beneficial.
- Restructuring Strategies: Restructuring the business, such as converting to an LLC or forming a Series LLC, might provide tax advantages.
- Utilize Professional Help: Consulting with tax professionals or accountants specializing in Texas franchise tax can provide tailored advice, ensure compliance, and help identify tax-saving opportunities.
For small businesses in San Antonio, managing your franchise tax can be straightforward with the right approach. Whether you choose to handle it yourself or work with an accountant, accuracy and timeliness are key.
Ensure you:
- Enter the correct information
- Save a copy of your form
- File by the deadline with the State Comptroller’s Office
If you need assistance or have questions about franchise tax or entity management, San Antonio Small Business Attorney Nathaniel Gilbert is here to help.
San Antonio Small Business Attorney Nathaniel Gilbert helps business owners with questions regarding Franchise Tax and other entity management scenarios. If you’d like to learn more about LLC or partnership management, Click Here. If you ‘d like to get in touch with Nate directly, Click Here. Take control of your business’s tax obligations and ensure compliance with professional guidance. Reach out today!
