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The Texas Franchise Tax: Are You Ready For The Drop?

On January 1, 2016, several changes that affect taxable entities organized or operating in Texas with annual revenues in excess of $1 million or with computed tax liability of $1,000 or more will go into effect. The changes affect franchise tax calculation rates as well as the availability of E-Z Computation for the business, and should be welcome news for many business owners in Texas.

The changes apply only to franchise tax reports due on or after January 1, 2016. For most businesses, the franchise tax rate drops from 1% of taxable margin to 0.75%. The rate drops from 0.5% to 0.375% for businesses engaged primarily in retail or wholesale operations. On top of the improved rates, eligibility for use of E-Z Computation and Rate under Section 171.1016 expands to include businesses with up to $20 million in revenue, doubling the previous qualifying revenue allowance. And, the associated tax calculation rate falls to 0.331% from the previous 0.575% rate.

These changes improve the business climate in the state significantly by reducing compliance costs for a larger number of businesses. The rate reduction also frees up cash that can be reinvested in the business. The compound result is that a large swath of Texas businesses are going to realize a substantial reduction in overhead that should directly improve the financial health of affected entities, which have the entire fourth quarter to plan and adjust for these much needed changes to the complexity of corporate taxes in Texas.

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