Deep in the Heart of Texas’s Corporate Franchise Tax

It’s no secret that state tax laws can be extremely complex, often with numerous pages of convoluted instructions. No state better illustrates this than Texas.

There are many unique rules for Texas Franchise tax returns, including numerous differences from federal law. It can even be complicated just figuring out which return should be filed for each year and determining the correct federal information needed to complete the report.

Calendar-Year Taxpayers

A Texas Franchise Tax Report year is typically 1 year ahead of the federal income tax return year. The annual Franchise Reports are due May 15 of each year, regardless of the company’s year-end. For example, a 2013 calendar-year taxpayer will file a 2013 federal income tax return and a 2014 Texas Franchise Report, which is due May 15, 2014.

Most taxpayers can request a filing extension to November 15. For EFT taxpayers—who paid a tax of $10,000 or more in any preceding year—the extended due date is August 15, at which time they need to file a second extension, even if no balance is due, to extend the filing due date again until November 15. Interestingly, Texas has not yet allowed the filing of these second extensions on its website without a payment. Thus, you can either pay in a balance of $1, or paper file the second extension. 

Fiscal-Year Taxpayers

The due dates and corresponding Texas Franchise Reports to file each year can be even more confusing for fiscal-year taxpayers. For these filers, the accounting period used is the one ending for federal income tax purposes in the calendar year prior to the calendar year the report is due. For example, a taxpayer with a fiscal-year ending March 31, 2015 will file a 2014 federal income tax return utilizing the information for the fiscal year ending March 31, 2015. This same information will be used for the 2016 Texas Franchise Tax Report, due May 15, 2016. Thus, the Texas Franchise Report for any given year is 2 years after the federal income tax return year. Utilizing the incorrect accounting period or filing the wrong year report can cause you to waste time and effort addressing administrative notices. 

Clearly, it is imperative that your tax advisor is well-versed on the differences in each state’s tax code and where issues may arise in order avoid these pitfalls.