Businesses take hit on new Texas franchise tax

Although Texas Comptroller Susan Combs announced an extension to June 16 for businesses to file the revised franchise tax, area accountants and business owners are feeling strained from more than just the deadline.

The issues causing concern are new tax forms and computations, and the hit on profits some businesses will face as the deadline nears.

The new franchise tax is expected to bring in about $11.9 billion to the state, almost doubling figures from the previous tax, said Texas ComptrollerÂ’s office spokesman R.J. DeSilva.

The new tax is based on gross receipts instead of profits, and was expanded to include corporations, businesses with limited liability protection, partnerships and business associations. Partnerships and business associations were not included in the previous tax, DeSilva said.

“The purpose of this was to pull more people into the franchise tax system,” said Cyndy Kimberling, owner of Kimberling, McFarland and Associates accounting firm. “If they would have left the forms alone and included all partnerships, the legislature would have attained the same end result without complicating the issue and in essence reinventing the wheel.”

Businesses that are excluded from the tax are sole proprietorships, businesses with gross receipts at or under $300,000, and general partnerships with individuals as partners.

About 50 percent of KimberlingÂ’s clients are under the $300,000 gross receipts line, she said.

Profits for some businesses will take a big hit from what is owed under the new tax, Kimberling said.

“I know of several of our clients who could be put out of business because the new franchise tax is based on gross receipts rather than bottom line profits,” Kimberling said. “It is really going to hurt some of our clients.”

The service industry may be hardest hit, she said.

“The ones who are really suffering are going to be your service businesses such as trucking companies,” Kimberling said. “They have a lot of expenses such as fuel and truck maintenance. The new franchise tax does not consider these expenses as cost of goods sold so they do not get to deduct them from their gross receipts.”

The revised tax also changed the way accountants do math to find numbers to plug into the new forms, which not only affects accountants, but also companies that make tax software computer products. The forms for the new tax were released on March 31.

“It is not a simple computation anymore,” Kimberling said. “It now involves a process that requires you to go through four different computations to arrive at which franchise tax method is going to be the best.”

The key calculation in the new franchise tax is based on a “margin calculation” that was not a part of the previous tax, DeSilva said. The margin is found by taking its total revenue and subtracting either salaries, cost of goods sold or 30 percent of the total revenue.

Sherry Green, president of Fort Worth-based Technology Team LLC, said the tax is costing her more than before.

The new tax “is costing us a lot more than normal, we’re probably going to pay about 70 percent more than we paid last year. It’s huge,” Green said.

The ComptrollerÂ’s office will have a more exact idea about what the revenues will be in August or September, after businesses that requested an extension file, DeSilva said. The revenue would be split with a portion going into a general revenue fund for the state, and a portion going into a property tax relief fund, which supplements education funding, DeSilva said.

The revised tax was part of House Bill 3, which passed the state legislature in 2006, DeSilva said. The bill also included property tax reductions.

Before the deadline extension, companies had about seven weeks between the release date and the deadline to file or ask for an extension that would last through the summer.

Contact Wimmer at lwimmer@bizpress.net