Texas Franchise Tax Changes: Increase in No-Tax-Due Threshold and Reporting Requirement Updates for 2024
By John Bonk, Partner, National Co-Leader - State & Local Tax
In a significant update to the Texas franchise tax, Senate Bill 3, enacted during the Second Special Session of the 88th Legislature, has introduced key changes that will take effect for reports originally due on or after January 1, 2024. The bill notably increases the no-tax-due threshold and revises filing requirements for certain business entities.
No-Tax-Due Threshold Increased to $2.47 Million
The no-tax-due revenue threshold, also known as the “margin” tax exemption, has been raised to $2.47 million. As a result, taxable entities with annualized total revenue less than or equal to this amount will owe no franchise tax. This adjustment represents a substantial change for businesses operating within the state and is likely to provide relief to many small and medium-sized enterprises.
Elimination of No-Tax-Due Reports
Starting in 2024, entities that fall below the new no-tax-due threshold will not be required to file the traditional no-tax-due report (Form 05-163). This move is designed to streamline the reporting process and reduce administrative burdens on businesses. However, it is essential for these entities to note that they must still file either Form 05-102, “Public Information Report,” or Form 05-167, “Ownership Information Report,” as specified by the Texas Comptroller of Public Accounts.
Combined Group Reporting
For combined group reports, all taxable entities within the group must be included, even if their individual annualized total revenues fall below the no-tax-due threshold. If the combined group’s total revenue does not exceed the threshold, the group will be exempt from filing a no-tax-due report, an affiliate schedule, or a common-owner information report for the report year. Each combined group member that is organized in, or has nexus with, Texas is still required to file a Public Information Report or Ownership Information Report.
Special Considerations for New Veteran-Owned Businesses
A noteworthy exemption under SB 3 pertains to new veteran-owned businesses, which are no longer mandated to file a no-tax-due report during their initial five-year period. This change effectively removes an administrative step for these businesses, supporting their growth in the early stages of operation.
Reporting for Qualifying Entities
Qualifying passive entities and real estate investment trusts are instructed to file either the Long Form Report (Form 05-158) or the EZ Computation Report (Form 05-169) in 2024. These entities will merely need to indicate their status by marking the appropriate circle on the form. Taxable entities with zero Texas gross receipts are also required to file one of these reports, entering their total revenue and Texas gross receipts.
Implications for Taxpayers
The adjustments introduced by SB 3 carry significant implications for entities subject to Texas franchise tax. It is crucial for these entities to review the revised filing requirements thoroughly and determine which forms they must file in light of the changes.
With the increased no-tax-due threshold and the elimination of specific reporting requirements, businesses in Texas should anticipate a more streamlined tax reporting process starting in 2024. While the no-tax-due report (Form 05-163) will be discontinued, entities must remain diligent in filing the necessary Public Information or Ownership Information Reports. These changes underscore the importance of staying informed about tax code amendments and their potential impact on business operations. Please reach out to your Marcum tax team for further questions.