Texas Franchise Tax Bill Provides Tax Benefits to Businesses

A significant Texas franchise tax bill, House Bill 500 (H.B. 500), was signed by Governor Perry on June 14, 2013. The H.B. 500 contains changes to franchise tax regulations that will benefit small businesses. Selected changes are summarized as follows:

Temporary Rate Reductions

  • For returns due in 2014, franchise tax rates will be 0.4875% for retail and wholesale entities and 0.975% for all others, previously 0.5% and 1%, respectively.
  • For returns due in 2015, franchise tax rates will be 0.475% and 0.95%, provided the State Comptroller certifies that sufficient revenues will be available.
  • For returns filed after 2015, rates return to the current 0.5% and 1% franchise tax.

$1 Million Revenue Exemption– Business entities with gross revenue less than $1 million will continue to be exempted from franchise tax. This exemption was scheduled to expire on January 1, 2014, returning to the $600,000 revenue exemption, however, the H.B. 500 enacts the $1 million exemption permanently.

New $1 Million Deduction– H.B. 500 creates a $1 million deduction from revenue as another option to calculate taxable margin. A taxpayer can select to deduct the statutory $1 million in lieu of deducting cost of goods sold or compensation. This amount will be adjusted for inflation every two years.

New Industries Identified as Retail/Wholesale– New industries are now identified as retail/wholesale, which qualifies them for the lower tax rate:

  • Automotive repair shops (SIC 753)
  • Heavy construction equipment rental or leasing (SIC 7353)
  • Equipment rental and leasing, not elsewhere classified (SIC 7359)

New Industry Eligible for COGS Deduction– The cost of transporting non-owned petroleum products through petroleum pipelines now qualifies for the cost of goods sold deduction.

H.B. 500 is effective January 1, 2014, unless noted otherwise. For more information on H.B. 500, contact Melton & Melton, LLP at 281-759-1120. To view a complete copy of the new Texas franchise tax bill, H.B. 500, please click here.