The Texas franchise tax is calculated using its own formula and there are numerous exemptions, and only a small portion of businesses operating in Texas actually owe it. However, the details can be confusing, so working with a tax professional is highly recommended. An experienced forensic accountant can provide expert Texas franchise tax preparation services that include the following:

• • • Determining whether a business is subject to the franchise tax – Entity structure is the first consideration for taxation purposes. In Texas, only some entities must pay the franchise tax. This includes corporations, limited liability corporations (LLCs), partnerships (including limited partnerships), trusts, banking instructions and a handful of other entity types.
      
      Sole proprietorships are not subject to the Texas franchise tax, and there are many corporation-specific exemptions to the tax, outlined in Section 171, subchapter B of the Texas tax code. They include many nonprofit entities and entities relevant to the public interest.
      
      On top of these entity-specific exemptions, small businesses are generally exempt from the Texas franchise tax through one of several provisions.
      
      For example, businesses with total revenue less than $1.13 million during the relevant tax year are exempt from the franchise tax. Businesses with a total franchise tax liability of $1,000 or less are also exempt.
      
      Further, businesses may opt for a $1 million revenue deduction that’s intended to offset the tax burden on those businesses whose revenue exceeds the franchise tax threshold by a small amount. Small businesses (those with less than $20 million in total revenue) can also use a simplified “EZ” computation that uses a flat tax rate to calculate a company’s franchise tax obligations.
      
      Companies don’t owe Texas franchise tax if they don’t have a physical presence in Texas, don’t do business in Texas and don’t have an economic “nexus” in Texas. However, the state’s definition for what constitutes business activity or nexus is extremely broad, so if your company engages in any business-related activity whatsoever in Texas, your company will likely be considered for franchise taxation purposes.
      
      A Texas franchise tax preparation expert can determine with certainty whether your organization is subject to state franchise taxes, so it can calculate its tax obligations accurately.
      
      
    • Calculating the business’s taxable margin – The company’s franchise tax obligations in Texas will be based on its taxable margin, which consists of several components, some of which are easy to determine, while some are not. A Texas franchise tax preparation service will know exactly how to approach tax calculations for your business, as the process may be slightly different depending on its entity structure.
      
      The most important part of the formula is total revenues, but these may be adjusted based on entity structure. Some can deduct “flow-through” funds from revenues, while other entities may deduct certain employee benefits. A forensic accountant can advise clients through this step and ensure their revenue calculations are on point.
      
      Once revenues are calculated, business owners may use one of four revenue deduction methods to reduce their franchise tax obligations. More on that down below.
      
      Then, the adjusted revenue figure is multiplied by the percentage of business the company does in Texas – a process known as apportioning. To determine this, the company’s receipts from business in Texas are compared to the company’s total receipts. This is another step that accountants can guide their clients through.
      
      The resulting figure is the company’s taxable margin. This is taxed at a rate of .375 percent for wholesalers and retailers, and .75 percent for all other businesses that pay franchise taxes.
      
      
    • Identifying the optimal revenue deduction method for Texas franchise taxes – There are four revenue deduction methods that businesses may use to reduce their franchise tax obligations in Texas. Which one is optimal for your organization will depend on how your business generates revenue, and how much it generates.
      
      For instance, businesses can elect to take a flat $1 million revenue deduction, which is a popular option for businesses that have minimal Texas franchise tax obligations. Businesses may choose to deduct the cost of employee compensation – popular for professional service companies – or the cost of goods sold – popular for retailers, wholesalers and other businesses that rely on inventory. In many cases, one of these revenue deductions will work. In the rare instance that they aren’t sufficient, businesses may opt for a flat 30 percent revenue deduction.
      
      It’s not always obvious which deduction strategy will provide the greatest reduction in franchise taxes. The calculations are complex and rely on many factors, and each of these must be backed by supporting financial documentation.
      
      A Texas franchise tax preparation service can help businesses select the optimal revenue deduction for their clients, ensuring they attain the greatest possible reduction in franchise taxes.
      
      And, once the hard part is done, a tax preparation expert can properly complete and file your tax returns so that your company’s franchise taxes are accurately reported, and your business remains in compliance.