It’s late July and all of a sudden, everyone that has to file the Texas Franchise Tax Report on extension is trying to figure out if they need to file a second extension on August 15, 2024. As a tax professional in Texas, I always get a number of questions about this filing requirement. So, let’s take a closer look and see if you (or your business) needs to file one of these second extensions.
What is the Texas Franchise Tax?
The Texas Franchise Tax is a privilege tax imposed on businesses operating in Texas. It’s assessed on all taxable entities organized in Texas or doing business in the state. This tax is based on a business’s margin, which is calculated in a few different ways, allowing businesses to choose the method that yields the lowest tax liability.
Key concepts to understanding the Texas Franchise Tax
Texas has a unique way of assessing the Franchise Tax and here are some key concepts to help you understand what to file and when to file it.
Due Date – The due date for all Texas Franchise Tax Reports is May 15 of the Report Year.
Report Year – The year in which the franchise tax report is due. For example, the 2024 annual report is the report due on May 15, 2024. For a taxpayer with a calendar year as their accounting period, this would be the 2023 accounting period.
Accounting Period – Except for the first and final franchise tax report, the accounting period is assumed to be a one-year period. This part can be tricky for first and final reports and if you have any organizational changes, like mergers or acquisitions. In this case, definitely speak with your tax professional.
- For a full 12-month period, the beginning date is the first day after your previous accounting period ended, and the ending date is the last accounting period end date for federal income tax periods. So, for a calendar year 2023, it would be 01/01/2023 – 12/31/2023.
- If you have a fiscal year, it is the fiscal year that ended within the 2023 calendar year. So for a fiscal year, the 2024 franchise tax report would be for the fiscal year that ended within 2023, such as a year 07/01/2022 – 06/30/2023. Note that this would be reported on a 2022 Federal Income Tax Return and a 2024 Texas Franchise Tax Report.
- I wrote a blog post explaining the Report Year and Accounting Period that goes into more details if you’re looking for this.
Electronic Funds Transfer (EFT) Payment Requirements – The amount of your prior franchise tax payments helps determine whether you are required to make EFT payments. These taxpayers are referred to as Mandatory EFT payors.
Mandatory EFT Payors – These are taxpayers who remitted $10,000 or more in franchise tax payments during the preceding state fiscal year (Sept 1 – Aug 31). Be careful with this requirement because even if your tax is less than $10,000, you can fall into this trap. If you make a large payment during the previous year with your extended tax return after Sept 1, and then make a large payment with your extension and if they add up to more than $10,000, then you fall into the Mandatory EFT Payor category. For example, supposed your extended 2022 franchise tax report was filed on November 15, 2022 and the payment due was $6,000. Then, you made an estimated tax payment with your 2023 franchise tax extension of $7,000 on May 15, 2023. In this case you’ve paid more than $10,000 during the state’s fiscal year and are a Mandatory EFT Payor for the 2024 Texas Franchise Tax Report.
Non-Mandatory EFT Payors – If you don’t fall into the Mandatory EFT Payors category, you have a lot more flexibility in terms of payments and extensions.
Filing Deadlines for the Texas Franchise Tax
The initial deadline for the Texas Franchise Tax Report is May 15th of each year. This deadline applies to all entities regardless of when your fiscal year (accounting period) ends. For this reason, we have our Texas returns as a separate project for all our business clients. All taxpayers are eligible to file an extension, but the length of the extensions depends on whether the taxpayer is a Mandatory EFT Payor or not.
Non-Mandatory EFT Payors
- First and Only Extension – these taxpayers will file their extension on May 15th and the franchise tax report is extended to November 15th. To be a valid extension, the taxpayer must pay 100% of the previous year’s tax balance or 90% of the current year’s tax balance due by May 15th. Even though the taxpayer isn’t required to pay by EFT, the state has a simple EFT payment system that all taxpayers can use and is what we recommend for our clients.
Mandatory EFT Payors
- First Extension – Similar to the Non-Mandatory EFT Payors, this extension is due on May 15th. The difference is that this extension is only a 3 month extension until August 15th. To be a valid extension, the taxpayer must pay 100% of the previous year’s tax balance or 90% of the current year’s tax balance due by May 15th.
- Second Extension – This second extension is due on August 15th. To be a valid extension, the taxpayer must pay the remaining balance due that will be reported on the annual franchise tax report. So, if you paid 90% of the balance on May 15th, this would be the remaining 10% due on August 15th. Paying the balance due and filing the extension will extend the tax deadline to November 15th.
As you can see, whether you need to make a payment and/or file a 2nd Texas Franchise Tax Extension on August 15th is a multi-step process. And this doesn’t even include actually calculating the amount of tax due. The way to remember the 2nd extension and the purpose behind it all lies in the way the state’s budget works. As I mentioned above, the state’s fiscal year is from September1 through August 31. Having the bulk of the Texas Franchise Tax payments received before August 31 allows the state to include this in the earlier period. Amounts that get paid after September 1 get included in the following year.
This post is to help you figure out your filing requirements, but it is not tax advice. You should always check with your tax professional to make sure this applies to you and your business. You can also review the instructions for the franchise tax report for more specific details. Texas Franchise Tax Report Forms for 2024