Texas Franchise Tax Filing Guide: 2024 UPDATE

At LedgerGurus we get a lot of questions about Texas franchise tax, so before we start, I'm going to walk you through a few key points that you need to know.

First, what is Texas franchise tax? Well, I know oftentimes when people hear the word franchise they think of something like McDonald's or Subway or Little Caesars or something like that. This actually has nothing to do with it. A franchise tax is a privilege tax for being able to do business in a certain state.

Imagine that you contacted a neighbor down the street and said, hey, I want to set up a lemonade stand in your front yard. And the neighbor said, sure, I just would like you to share some of your sales earnings with me. That's basically what a franchise tax is.

0:57

Now, one thing that's helpful to know is that franchise tax is not the same thing as an income tax or a sales tax. A franchise tax is something that is paid by the companies, by the businesses themselves, for the privilege of doing business in a certain state. It's paid off of the gross sales, not the profit like an income tax. And it's different from a sales tax because it's not charged to the end consumer, it's paid by the businesses themselves.

Another thing that's important to note is that franchise tax is based on your annualized total revenue as stated on your federal income tax return.

1:34 Who has to pay

Okay, so who is responsible for paying Texas franchise tax? Well, this goes into a discussion on nexus. If you don't already know what nexus is, don't worry, we've discussed it in great detail in this video, so make sure that you go and watch that.

In a nutshell, all businesses who have nexus in Texas, whether they are ecommerce or brick and mortar or any other businesses, if they meet a certain income threshold, they are required to pay Texas franchise tax.

So let's talk about what those thresholds are. Well, it used to be, prior to 2024, if a business had nexus in Texas and they were less than 1.18 million, then they would have to file what was called a No Tax Due Report. Meaning, yep, we know that this is here, we don't have responsibility to pay for it yet.

That changed as of January 1st, 2024. The revenue threshold has been increased to 2.47 million, and the No Tax Due Report is no longer required. So if you have nexus in Texas and you have less than 2.47 million in annualized total revenue as stated on your income tax return, you don't have to worry about Texas franchise tax yet.

2:45 Which form you file

So now there are two kind of categories that businesses are put into to pay this tax. So the first one is, if you are between 2.47 million and 20 million, you will fill out the EZ Computation Report. If you are over 20 million, then you would fill out the Long Form Report. The main difference between the two are the deductions that you can take.

Now, since we are an ecommerce accounting firm, we want to talk specifically to ecommerce sellers for a moment. This is why it's really important for you to note that this is not the same thing as sales tax. As opposed to marketplaces like Amazon and Etsy and eBay that collect sales tax from your customers and then remit it directly to the state, that is not what's going to be happening here. This is a tax on your gross sales, so this is a tax that you have to pay regardless of what channels that you're selling on.

Now, another thing that's important to note is that the due date is May 15th. Just so you know, if it's on a weekend or a holiday of some sort, then the due date becomes the next business day. But as of this year, it's May 15th.

3:37 Before you start filing

So filing your Texas franchise tax actually comes down to four basic steps. The first one is find your total revenue. The second one is subtract your deductions. The third is to choose your margins. And the fourth is to multiply by the tax rate, which is 0.375% for most businesses.

So let's talk about filing here. The first thing that you're going to do is go to the Texas Comptroller's website. The link is in the description below.

And just so you also know, typically you will not have to register for a Texas franchise tax account. When you file for a sales tax permit, you're automatically set up for a Texas franchise tax account. You should have received your web file number in a letter when you registered for your sales tax permit.

You can extrapolate your franchise tax web file number from your sales tax web file number. You'll do that by changing the last digit of your sales tax permit number by adding one to it. So if it's a four, it becomes a five. And also, a sales tax permit number has an R at the beginning of the number, and it will change to an X for franchise tax number.

4:50 The EZ Computation Report

Okay, so now I'm going to show you how to fill out the report. As you can see, this is the EZ Computation Report, and the top part is actually pretty self-explanatory. You'll need your taxpayer number, contact information. You're going to need your accounting year begin and end dates, and your NAICS code, which usually for online sellers is 454110.

If you have any questions about this computation report while you're filling it out, there's actually a really comprehensive instructions sheet. It's about 30 pages long, so if you have any questions, that will answer anything that you have.

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Now, one thing that's really important is that lines one through seven on this next part need to match your federal income tax return exactly. This is why you really can't file your Texas franchise tax report until after you filed your federal income tax return, and that's also why the deadline is a month after the income tax deadline.

On line eight you're going to add up lines one through seven, and line nine is your bad debt expense. Line 10 is going to be line eight minus line nine. This is why you don't want to just multiply your gross receipts in Texas by the Texas franchise tax rate.

Now 11, you're going to pull the gross receipts for Texas from your sales channel. And then for line 12, make sure that you definitely check the info icon for more info on this one if you're confused right here. Then for line 13, you're going to divide line 11 by line 12. On line 14 you're going to multiply line 10 by line 13. And then lines 15 through 17, just do the math, and then sign it at the bottom.

6:32 The Long Form Report

Okay, so now this is the Long Form Report. Everything is pretty much the same as on the EZ form, but it's on two pages and you're going to go into a bit more detail.

Lines 10 through 23 will also allow you to take more deductions. You'll then use those numbers to get your apportionment factors and the taxable margin. Finally, you'll calculate the total tax due in Texas.

Again, if you get confused, just make sure to click on the info icon at the beginning of each line.

6:59 Summary

So to wrap up, let's summarize a few key points.

First, the due date for Texas franchise tax is May 15th.

Second, you don't have to worry about Texas franchise tax, one, if you don't have nexus in Texas, and two, if you are less than 2.47 million in annualized total revenue as stated on your income tax return.

If you are at the 2.47 million, then between that and 20 million, you will fill out the EZ Computation Report. If you're over 20 million, you'll fill out the Long Form Report.

If you are sick of dealing with this and you're ready to hand over your sales tax and your franchise tax to the experts, make sure that you reach out to us here at LedgerGurus. We have a specialized team that does this day in and day out and can help you and take this off of your shoulders.

As always, thanks for watching. Please like this video and share and subscribe, and if you have any questions, make sure that you put them in the comments down below. Thanks, we'll see you next time.