Introduction In July 2023, Texas embarked on a significant overhaul of its franchise tax system with the enactment of Senate Bill 3. This legislation brings pivotal changes effective from January 1, 2024, including a raised no tax due threshold and modified reporting requirements for specific entities. This guide aims to demystify these changes, providing a straightforward, step-by-step understanding for businesses and individuals navigating this new tax landscape.
Understanding the Increased No Tax Due Threshold
A Leap to $2.47 Million
Firstly, let’s delve into one of the most impactful changes: the increase of the no tax due threshold. Previously set at $1.23 million, the threshold has now been more than doubled to $2.47 million. This means that any business with annualized total revenue below this amount is exempt from certain tax liabilities. This change not only simplifies tax filing for smaller businesses but also aligns with the state’s goal of fostering business growth and economic development.
Adjusting to New Filing Requirements
Simplifying Compliance for Taxpayers
Consequently, the state has discontinued the requirement for the No Tax Due Report (Form 05-163) for entities falling below this new threshold. However, these entities are not completely off the hook. They are still required to submit either the Public Information Report (Form 05-102) or the Ownership Information Report (Form 05-167). This strategic move reduces the administrative burden, particularly benefiting nonprofits in the process of securing federal tax exemptions.
Special Rules for Combined Groups
Collective Reporting Responsibilities
Furthermore, the new legislation stipulates specific rules for combined groups. All entities within such a group must be included in a combined tax report, regardless of individual revenue figures. However, if the group’s collective revenue is under the threshold, it becomes exempt from filing a franchise tax report and associated schedules. Each member with a Texas presence, though, must still file a Public Information Report or Ownership Information Report, ensuring transparency and compliance.
Focused Support for Veteran-Owned Businesses
Easing the Burden on Veterans
Moreover, the state shows its support for veterans by exempting new veteran-owned businesses from filing the No Tax Due Report in their first five years. This exemption acknowledges the unique challenges faced by veteran entrepreneurs and demonstrates Texas’ commitment to their success.
The Compensation Limit Increase
Calculating Taxable Margins with New Limits
Another notable change is the increase in the compensation limit for calculating taxable margin, now set at $450,000 per person. This adjustment affects how businesses compute their taxable margin, allowing for a higher deduction cap and potentially lowering overall tax liabilities.
Tailored Filing for Specific Entities
Addressing Unique Entity Needs
The legislation also brings tailored filing requirements for entities like certain passive entities and REITs. These entities must now file either the Long Form Report or the EZ Computation Report, with a new section for identification. Entities with zero Texas gross receipts are similarly required to file these reports, providing specific revenue details.
Conclusion
The 2024 changes to the Texas franchise tax system mark a significant shift in the state’s tax policy, aiming to reduce complexities and encourage business growth. By staying informed and prepared, Texas businesses can navigate these changes smoothly, ensuring compliance and optimizing their tax strategies in the year ahead.
