Celebrating 125 Years

Planning and Choice of Entity After the New Texas Franchise (Margin) Tax

Through December 31, 2006 corporations and LLCs were subject to the former version of the Texas franchise tax, which was equal to the greater of (i) 0.25% of its "taxable capital" (generally owners' equity) and (ii) 4.5% of its "net taxable earned surplus." "Net taxable earned surplus" was computed by determining the entity's reportable federal taxable income, adding to that amount the compensation of officers and directors. The add-back was not required if (x) the corporation had not more than 35 shareholders or was an S-corporation for federal tax purposes with no more than 75 shareholders, or (y) the LLC has not more than 35 members. The result was apportioned to Texas based on the percentage of its gross receipts from Texas sources. Although labeled a "franchise tax," the tax on "net taxable earned surplus" was really a 4.5% income tax levied at the entity level.

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Jan 15, 2008

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