Corporations, limited liability companies, and other entities that are organized or do business in the state of Texas are subject to franchise tax.
For entities with total revenue of more than $20 million, franchise tax is determined based on the taxable margin of an entity. Taxable margin is determined by taking the total revenue of the entity subtracting: (a) 30 percent of total revenue; (b) one million dollars; (c) cost of goods sold; or (d) compensation. The result is the entity’s margin. The entity’s margin is then apportioned to the State of Texas to arrive at the entity’s apportioned margin. The entity’s apportioned margin is reduced by other allowable deductions to arrive at the entity’s taxable margin. The entity’s taxable margin is then subject to the applicable rate of franchise tax. For entities that aren’t primarily engaged in retail or wholesale trade, the rate of franchise tax is currently .75%. For entities that are primarily engaged in retail or wholesale trade, the rate of franchise tax is .375%.
Entities with total revenue of $20 million or less are taxed at a rate of at .331% of the entity’s total revenue, without deduction for 30 percent of total revenue, one million dollars, cost of goods sold, or compensation.
Entities that are subject to the franchise tax must file annual reports with the Texas Comptroller. Failure to file franchise tax reports or pay franchise tax may result (1) in forfeiture of the entity’s right to transact business in Texas; or (2) forfeiture of the entity’s charter or certificate with the Texas Secretary of State.
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