HOUSTON BUSINESS REVIEW

Franchise Tax Letter Part One
By Gary Cooper

GARY N. COOPER, C.P.A., C.V.A., is managing partner of Cooper, Bergman & Company, L.L.P., certified public accountants which was formed in 1991, assisting small businesses and individuals with accounting, consulting and income tax planning and compliance. Services provided include medical practice consulting, business valuation, assistance with buy/sell transactions, development and implementation of policies and procedures, accounting services and tax compliance and planning. The Company has offices in Plano and Houston, Texas.

In the following two part article I’m going to review the controversial expansion of the franchise tax and how it will affect Texas Businesses.  In part one I will review how the computation is determined and provide a panoramic overview of the major focal points of the tax.  In part two I will do an overview of those specific focal points and discuss a possible future of the tax.

For many years, the state of Texas has charged a franchise tax to certain businesses for the privilege of conducting business within the state.  This year has marked significant change in the way entities are taxed for the privilege beginning with periods beginning with January 1, 2007.  These resulting changes are now referred to as the new “margin tax” or “HB3”, which was named in the state legislature.  These changes affect substantially more types of business structures in Texas, and include a broadened qualification of entities’ taxable revenue bases.  Right now Texas businesses are wondering how they may be affected by these state tax law changes.  Cooper, Bergman, and Co., LLP, is positioned to handle these inquiries and simplify clients’ understanding of the revised calculations.

The computation for the margins tax can be described in this simplified formula:
Total Revenues – generally determined by the Federal income tax return
Less: the greater of COGS, Compensation, or 30% of Total Revenues
Times: a single factor apportionment factor
Less: any allowable deductions or credits
Times: the margin tax rate
Equals: the tax due on margin 

Major focal points of the margin tax are:

• Entity Structure
• Determination of Taxable Revenues
• Determination of Deductions (COGS, compensation, or 30% of revenues)
• Apportionment of Revenue
• Combined Reporting and Special Credits

Small businesses that owe less than $1,000 or have no more than $300,000 in total revenue are exempt from the tax, with certain exceptions (utilities and telecommunications).

In part two I will look at the specifics of the points above and provide information on the tax’s possible future.