Answers to common questions about the Texas Franchise Tax Report

What your tax professional wishes you knew about the Texas Franchise Tax Report.

First off, this isn’t a technical, how to prepare your franchise tax report. What I am sharing with you comes from years of questions about the Texas Franchise Tax Report from clients and friends. Don’t blame us that the tax is quirky, we don’t make the rules, we just help you follow them.

What follows is not to be taken as tax advice, rather simplified explanations to common questions. Please seek professional assistance to answer your specific tax questions. Additionally, the Texas Comptroller of Public Accounts has a great set of instructions and online resources that should be able to assist you in getting an answer. I’ll also note, the Comptroller’s office has some of the nicest and most helpful telephone assistance representatives that I’ve worked with, so give them a call if you can’t find your answer on their website.

What’s in a name?

What people call this tax, and its related return, can get confusing. The first question is why did they change it to a margins tax but still call it a franchise tax. Well, what they did was change the way the franchise tax is calculated, without actually changing the tax. The tax is calculated on the taxable margin, but it is still a franchise tax.

Another confusing thing about this tax and the related return is whether we call it a tax return or a tax report. The official name is the Texas Franchise Tax Report but in most tax offices, it’s referred to interchangeably as a return or report. You’ll hear tax pros call it both and you’ll just have to learn they’re referring to the same report. I make an effort to refer to it as a report but even I slip up because the word “return” seems so much more appropriate based on all the other tax filings we prepare.

A more confusing piece of the name is that the year assigned to the report. This being an annual report (i.e., tax return), you would expect to refer to this report by the time period being taxed. Texans hate taxes so much that they even made this complicated. You have to think of two categories for this report.

  1. The first category is the year that the return is filed. Since all reports are filed on May 15th (see Due Date section below), the official name of the report includes the year in which the return is filed. That means that the return which is due on May 15, 2018 is the 2018 Texas Franchise Report.
  2. The second category is the accounting period which is being taxed. The beginning date of the accounting period is the date after the last accounting period ended. The ending date is the ending date of the accounting period for your federal income tax return that ended before the year the franchise tax report is due.

Let’s look at some examples to help you understand this strange bifurcation of the dates. Assume your federal accounting period is the calendar year. For your 2017 accounting period you will file your franchise tax report on May 15, 2018, so this would be your 2018 Texas Franchise Tax Report. Keep in mind, it is based on your 2017 federal income tax return. Now assume your federal accounting period ends on March 31. For your federal return, the tax period April 1, 2016 through March 31, 2017 would be included on a 2016 federal income tax return; however, because of #2 above, it will be included on your 2018 Texas Franchise Tax Report. I’ll also point out that for financial reporting purposes, this same time period is usually referred to as 2017 (since that is the year the financial period ends). This is where most people get confused and even tax pros sometimes even have to do the mental calculations in their heads to make sure we’re referring to the correct tax return (or report) for the time period in question. To make it even more complicated, I’ve had instances where the March 31, 2018 federal income tax return (on a 2017 IRS tax form) was filed before the March 31, 2017 Texas Franchise Tax Report was filed (on a 2018 Texas tax form).

To help keep these dates straight, here’s a simplified way to remember the appropriate “year” for the financial activity:

  • For federal income tax purposes, you generally use the year in which the financial activity begins.
  • For financial reporting purposes, you generally use the year in which the financial activity ends.
  • For Texas franchise tax purposes, you generally use the year after the financial period ended.

What is the due date?

Let’s look at the unusual due date for this report, the due date is May 15. Regardless of your fiscal year-end, the report is always due on May 15th. This is why this tax is top of mind right now with tax preparers across Texas. This date has been fixed in stone since I started work in the Coopers & Lybrand, LLP office back in 1996 we we’re all used to this date. For those of you who remember the old “initial” return, at least we don’t have to deal with that crazy monster any more.

Can I file for an extension?

So now we’re less than a week away from the due date and what if you’re not ready to file the return. Guess what, you can extend the return. The question is: how long will your extension of time to file last? The answer is: it depends.

Let’s first break it down into the two groups of taxpayers that the Comptroller uses to distinguish taxpayers.

  • Electronic Payments Required: If you paid $10,000 or more in franchise tax payments during the preceding state fiscal year (Sept. 1 through Aug. 31), then you’re required to make your Texas Franchise Tax payments electronically. The state has specific requirements for the method of electronic payments that you should review with your tax professional to confirm you are in compliance.
    • If you fall into this category, you can extend your tax return until August 15, that is a 3 month extension. (See payments below)
    • If you need additional time after August 15, then you can file a second extension that will extend your tax return until November 15. This is the second 3 month extension. (See the note about 2nd payments below)
  • Not required to make electronic payments: If you paid less than $10,000 in franchise tax payments during the preceding state fiscal year, then your payments can be made online using the Comptroller’s website, or you can send a business check.
    • If you fall into this category, you can extend your tax return until November 15, that is one extension for 6 months. (See Payments below)

What do I need to know about making payments?

If you’re filing your return before the deadline and don’t need an extension, then you should make your payment when you file your tax return. If you’re filing an extension and you’re going to owe franchise taxes, then in order for the extension to be valid, you need to pay at least the minimum of the following amounts by May 15:

  • a) 100% of the prior year’s tax liability, or
  • b) 90% of the current year tax liability

In order to use the 100% of the prior year’s tax liability, you must have filed the prior year’s franchise tax report by May 14 of the current year. There are a few limitations on using the prior year’s tax liability as the amount to pay so I recommend you check with your tax professional before you rely on this method.

Second Extension Tax Payment:
If you are one of the taxpayers required to make your payments electronically, then you might need to make a second payment with your 2nd extension that is due on August 15. For your second payment, you need to pay the difference from what was paid by May 15 and 100% of your current tax liability. In other words, you need to make sure 100% of your tax is paid by the August 15th second extension.

Finally, you should go over all the requirements about payments and extensions with your tax professional. I’ve given you a simplified explanation with broad strokes to help clear up some of the confusion that normally comes up with the Texas Franchise Tax Report. Like any other tax, there are complications, limitations, and exceptions that can come into play depending on your specific circumstance.

If you need assistance with your Texas Franchise Tax Report, then get in touch with me using my Contact Me page.