Franchise TaxFranchise Tax

April 27, 2005April 27, 2005

Frequently Asked Frequently Asked QuestionsQuestions

What is franchise tax?What is franchise tax?

The Texas franchise tax is a The Texas franchise tax is a privilege tax imposed on privilege tax imposed on

corporations that are chartered in corporations that are chartered in Texas and non-Texas Texas and non-Texas

corporations that do business in corporations that do business in Texas.Texas.

How is Franchise Tax How is Franchise Tax Calculated?Calculated?

Corporations pay the greater of the tax Corporations pay the greater of the tax on net taxable capital or net taxable on net taxable capital or net taxable

earned surplus.earned surplus. Taxable Capital is a corporations Taxable Capital is a corporations

stated capital plus surplus. The tax stated capital plus surplus. The tax rate is 0.25% per year.rate is 0.25% per year.

Earned Surplus basically includes Earned Surplus basically includes the corporations net taxable income the corporations net taxable income plus compensation paid to officers plus compensation paid to officers and directors. The tax rate is 4.5% and directors. The tax rate is 4.5%

per year.per year.

Is there a minimum tax?Is there a minimum tax?

Corporations that owe less than Corporations that owe less than $100 do not have to pay any tax, but $100 do not have to pay any tax, but

they must file a report. Also, they must file a report. Also, corporations will not owe any tax if corporations will not owe any tax if

the gross receipts are less than the gross receipts are less than $150,000 or had total taxable capital $150,000 or had total taxable capital

less than $40,000. less than $40,000.

What are the franchise tax What are the franchise tax filing requirements?filing requirements?

A corporation’s first (initial) report is A corporation’s first (initial) report is due one year and 89 days after the due one year and 89 days after the corporation’s beginning date. corporation’s beginning date.

After the initial report is filed, the After the initial report is filed, the corporation will file annual reports corporation will file annual reports

due each May 15.due each May 15.

Can you file extensions?Can you file extensions?

An initial filer may request a 45 day An initial filer may request a 45 day extension but the request must be extension but the request must be

postmarked on or before the original postmarked on or before the original due date and must include 90% of due date and must include 90% of the tax that will be due when the the tax that will be due when the

report is filed.report is filed.An annual filer may request an An annual filer may request an

extension until November 15 but the extension until November 15 but the request must be postmarked on or request must be postmarked on or before May 15 and must include before May 15 and must include

90% of the tax that will be due when 90% of the tax that will be due when the report is filed.the report is filed.

Are there any penalties?Are there any penalties?

If a franchise tax report is not filed by If a franchise tax report is not filed by the due date, a 5% penalty is the due date, a 5% penalty is

imposed on the amount of franchise imposed on the amount of franchise tax due. If any part of the tax is not tax due. If any part of the tax is not

reported or paid within 30 days after reported or paid within 30 days after the due date, an additional 5% is the due date, an additional 5% is added. Interest is also accrued added. Interest is also accrued beginning 60 days after the due beginning 60 days after the due date. The 2005 interest rate is date. The 2005 interest rate is

6.25%.6.25%.

Who can sign the Texas Who can sign the Texas franchise tax report?franchise tax report?

An officer, director, or any other An officer, director, or any other person authorized by the corporation person authorized by the corporation

can sign the report.can sign the report.

What is a Public Information What is a Public Information Report?Report?

The Public Information Report is a The Public Information Report is a listing of the officers and directors of listing of the officers and directors of the corporation. Public Information the corporation. Public Information Reports must be filed with the initial Reports must be filed with the initial

and annual franchise tax reports. An and annual franchise tax reports. An officer, director, or other authorized officer, director, or other authorized

person, must sign the Public person, must sign the Public Information Report.Information Report.

How are changes to the How are changes to the officers & directors of a officers & directors of a

corporation reported to the corporation reported to the state?state?

Since the Public Information Report Since the Public Information Report is filed every year, you simply make is filed every year, you simply make changes to this report. When you changes to this report. When you are filing a preprinted form, just are filing a preprinted form, just

cross out any incorrect preprinted cross out any incorrect preprinted information and enter the correct information and enter the correct

information.information.

Procedures for FilingProcedures for Filing

First, you need to perform a First, you need to perform a corporation search from the corporation search from the

comptroller’s website. This will comptroller’s website. This will show if an association is in good show if an association is in good standing, when the franchise tax standing, when the franchise tax return is due, the information for return is due, the information for

registered agent, mailing address registered agent, mailing address the comptroller has on file, and if the comptroller has on file, and if the association is exempt from the association is exempt from

filling. This website is: filling. This website is: http://ecpa.cpa.state.tx.us/coa/http://ecpa.cpa.state.tx.us/coa/

Index.htmlIndex.html..

(Pages 1-4)(Pages 1-4)

Most of the associations will receive Most of the associations will receive preprinted forms mailed from the preprinted forms mailed from the comptroller. You can also go to comptroller. You can also go to

http://www.window.state.tx.us/taxinfo/http://www.window.state.tx.us/taxinfo/taxforms/05-forms.htmltaxforms/05-forms.html

to get the necessary forms in Adobe to get the necessary forms in Adobe format. format.

Pages 5-6Pages 5-6

If the association has not had their If the association has not had their final income tax return filed for the final income tax return filed for the

prior year, you must file an extension prior year, you must file an extension for the franchise tax. Print a copy of for the franchise tax. Print a copy of the end of the year financial balance the end of the year financial balance sheet and income statement. Make a sheet and income statement. Make a

copy of the Franchise tax report to copy of the Franchise tax report to figure the amount due. With an figure the amount due. With an

extension you are only required to extension you are only required to pay 90% of the amount you figure out pay 90% of the amount you figure out

to be due.to be due.

**Remember ~ You MUST file the final **Remember ~ You MUST file the final franchise report once you receive the franchise report once you receive the

final income tax return**final income tax return**

Pages 7-13Pages 7-13

If the association has had their final If the association has had their final income tax return filed, use this income tax return filed, use this

return to figure out the franchise tax.return to figure out the franchise tax.

Pages 14-21 Pages 14-21

If a corporation’s gross receipts are If a corporation’s gross receipts are less than $150,000 or had total less than $150,000 or had total

taxable capital less than $40,000, taxable capital less than $40,000, you will file a No Tax Due report. you will file a No Tax Due report.

Page 13Page 13

Whether an extension, final Whether an extension, final return, or a no tax due report is return, or a no tax due report is

filed, it must be sent with a Public filed, it must be sent with a Public Information Report. If AMI is not Information Report. If AMI is not

the registered agent, a board the registered agent, a board member must sign the return.member must sign the return.

Page 22Page 22

Make two copies of the information that Make two copies of the information that you send to the Comptroller. One you send to the Comptroller. One

copy should be filed in the A/P copy should be filed in the A/P franchise tax file and the other franchise tax file and the other

should be given to the administrator should be given to the administrator for their tax file. for their tax file.

The Comptroller’s office maintains a The Comptroller’s office maintains a toll-free number (1-800-252-1381) to toll-free number (1-800-252-1381) to answer your franchise tax questions. answer your franchise tax questions.

You can also email them at You can also email them at tax.help@cpa.state.tx.ustax.help@cpa.state.tx.us or you can or you can

write to: Comptroller of Public write to: Comptroller of Public Accounts, 111 E. 17Accounts, 111 E. 17thth Street, Austin Street, Austin

TX 78774.TX 78774.