A privilege tax is imposed on all taxable organizations doing business in Texas. It is imposed by the state itself and is also known as the franchise tax. The amount of Franchise tax is dependant upon the the business revenue calculated annually. Whether one has to pay this tax or not depends upon the annual revenue of the business. If the annual revenue of the business is below a certain limit, then Franchise preparation tax is not valid for that business.
Filing a franchise report is compulsory for all businesses in Texas, regardless of the fact whether they have to pay the tax or not. Today it is considered to be the largest tax increase in Texas history and this was mainly due to drafted legislation that drastically changed the system in Texas. The Texas Franchise tax was a large voluntary tax prior to this legislation and it became a mandatory tax on all business firms.
Corporations, limited liability corporations, business trusts, associations both business and professional ones, joint ventures, partnerships and other legal firms are defined as taxable entities according to the state of Texas. The non taxable entities are general partnerships, sole proprietorships and some dead entities or passive ones which are not subject able to franchise taxes. If a request is made by a non profit to be excused from paying franchise tax by filing an application for exemption by the state, such an organization which is then exempted from paying the tax also does not need to file annual franchise reports.
The total revenue, cost of goods sold and compensation are the factors responsible for the calculation of the amount of franchise tax. The firms have to make a choice between the cost of goods sold and compensation to determine the franchise tax due. If the annual revenue is less than $300,000, then the entity is not required to pay the tax. However they have to file the franchise report and not doing so will impose penalties and fines on that particular firm. A “no tax due report” has to be filed in this case. The entities having reasonable pricing on a annual revenue greater than $300,000 and less than $900,000 are given reasonable pricing.