It’s essential to keep your franchise tax filings current with the Texas Comptroller and Secretary of State so you don’t forfeit your right to transact business in Texas. The consequences are that you can lose your right to sue or defend yourself in a Texas court. Additionally, officers and directors can be held personally liable for the business’s debts.
Occasionally documents are entered into the Comptroller’s system incorrectly, and you’ll receive a notice when that happens. Contact your tax advisor immediately to get it cleared up. To check the status of your business within Texas, you can click on this link to the Comptroller’s website.
Credits And Exemptions That Can Reduce Your Franchise Tax Liability
Texas offers a few credits and exemptions that can be used to offset your business’ Texas franchise tax liability. These generally apply to a very narrow type of taxpayer. However, the benefits can be tremendous if you qualify.
Research & Development Credit
Businesses involved in qualified research can take advantage of a credit either through a sales and use tax exemption on physical personal property directly used in qualified research or a franchise tax credit which is based on qualified research expenses. Qualified research is defined as technological research and/or experimentation on creating or improving a business function. Once the credit is established, it can be carried forward for 20 years if you are unable to use it. For more information about the R&D credit, see the Texas Comptroller website.
Historic Structure Rehabilitation Credit
If you own a certified historic structure, there’s an opportunity to garner a credit of up to 25% of expenditures associated with certified rehabilitation efforts. The credit is applicable toward Texas franchise tax or insurance premium taxes and can be carried forward for five years. The following criteria must be fulfilled to qualify for the Historic Structure Rehab credit:
- The structure must be placed in service on or after September 1, 2013.
- The entity claiming the credit must have an ownership interest in the property during the calendar year the asset is placed in service after the rehabilitation.
- Eligible rehabilitation expenditures must exceed $5,000.
It’s important to get approval before the process begins. For more information about the Historic Structure Rehabilitation Credit, visit the Texas Historical Commission website.
Veteran-Owned Business Exemption
Newly formed veteran-owned businesses can apply for an exemption from franchise tax for the first five years after starting the business. The following conditions must be met to qualify:
- The entity was established:
- on or after January 1, 2016, and before January 1, 2020, or
- on or after January 1, 2022, and before January 1, 2026;
- Each owner must be a natural person that has been honorably discharged from a branch of the U.S. Armed Services.
- Each owner must be able to produce a Letter of Verification of the Veteran’s Honorable Discharge from the Texas Veterans Commission.
In addition to the above criteria, Form 05-163 must be filed annually to maintain exempt status. Click here to learn more.
If you have questions regarding eligibility for franchise tax credits or exemptions, contact your ATKG advisor, and we would be happy to assist you.
Sarah Browne received her Bachelor of Business Administration and Master of Professional Accounting from The University of Texas at Austin. She spent nearly a decade working in the commercial real estate, private equity, and financial services industries before joining ATKG in 2021.
