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Texas 2-Step: Hello Margin Tax

On May 18, 2006, Texas Governor Rick Perry signed House Bill 3 into law, establishing the new Texas margin tax superseding the state's old franchise tax. This tax is effective for 2007 returns that are filed in 2008.

Which businesses must pay the margin tax?

The margin tax is imposed on taxable entities that do business in Texas or that are chartered or organized in the state, excluding sole proprietorships, grantor trusts and estates, general partnerships with direct ownership by natural persons, and/or "passive entities." Disregarded and other entities with limited liability are subject to the tax.

What is a passive entity?

Texas Tax Code Section 171.0003 defines a passive entity as one that:

1. Is a general or limited partnership or a nonbusiness trust;
2. Derives at least 90% of its income from passive income (e.g., dividends, interest, royalties and real property gains); and
3. Does not receive more than 10% of its federal gross income from conducting an active trade or business.

How does the margin tax work?

The margin tax rate is 1% of the taxable margin amount (0.5% for retailers and wholesalers). The taxable amount is gross revenue minus your choice of one of the following:

• Cost of goods sold (COGS), which is calculated differently than federal COGS
• Compensation including wages, employee benefits and net income distributable to a natural person. The maximum salary (excluding benefits) allowable to be deducted for a single individual is $300,000.
• 30% of gross revenue

Note for contractors: Gross receipts do not include amounts paid to subcontractors.

Taxpayers must file even if no tax is due

The margin tax does not apply if total gross revenues are less than $300,000 or the total tax amounts to less than $1,000. However, returns must still be filed even if no tax is due.

Texas now requires combined tax returns

Another new item for Texas returns is combined reporting. Taxable businesses that are part of an affiliated group engaged in a unitary business must file a combined tax return.

Filing deadline extended to June 16

The first margin tax was originally due May 15, 2008. However, due to a delay in form availability, and lack of guidance the Texas comptroller has allowed all businesses an extra 30 days to file. The revised due date for the first Texas Margin Tax return is June 16, 2008, with future returns due on May 15 of the corresponding year.

If you have any questions, please contact Ken Buczkowski at 312-980-2951 or Jason Parish at 312-980-2959 for more information. Our thanks to Deb Rood for her contribution to this article.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.