How does the $150,000 franchise-tax gross-receipts threshold work, and how are 'gross receipts everywhere' computed for each component of the tax?

Plain-English summary

A taxpayer asked how the $150,000 franchise-tax gross-receipts "exemption" works and how to compute gross receipts everywhere for each part of the tax.

• $150,000 is a threshold, not a deduction. For reports originally due on or after January 1, 2000, a corporation owes no franchise tax if its gross receipts from its entire business for both taxable capital and taxable earned surplus are each less than $150,000. If gross receipts everywhere for either component are $150,000 or more, the corporation gets no $150,000 deduction - the full amount is used.
• The under-$100 rule still applies. As in prior years, no tax is due if the computed tax is less than $100. Either way, an eligible corporation must still file an abbreviated information report plus a completed, signed Public Information Report.
• Computing gross receipts everywhere - by component.
  • Taxable capital: based on revenues under the taxpayer's GAAP reporting method (Rule 3.549(b)(5) and Rule 3.547(c)(1)); or, if the taxpayer qualifies and elects the federal income tax method, as outlined in Rule 3.549(e) (these receipts are not necessarily the same as earned-surplus receipts, due to exempt income, etc.).
  • Earned surplus: based on the revenues recognized for federal income tax purposes for the reporting period (Rule 3.557(b)(4)).

Currency note: This 2000 letter applies the pre-2008 franchise tax (replaced by the margin tax effective January 1, 2008 under House Bills 3 and 3928). The margin tax has its own no-tax-due thresholds and revenue computation; confirm current law.

What this means for you

Small corporations near the $150,000 line

The relief was cliff-edged: stay under $150,000 of gross receipts everywhere on both components and you owed nothing; hit $150,000 or more on either and you got no partial deduction - you were taxed on the full base. Crossing the line therefore mattered a lot, and even a fully-exempt corporation still had to file the abbreviated and public information reports.

Tax professionals

The letter clarifies that the $150,000 is a qualification threshold, not a subtraction, and pins down the per-component revenue sources: GAAP (or elected federal-income-tax method) for taxable capital, and federal-income-tax revenues for earned surplus. Note the STAR subject line references 1999 "small business relief (SB 441)," but the letter analyzes only these mechanics, not the bill. Re-verify the threshold and computation under the margin tax's own rules.

Common questions

Q: Is the $150,000 a deduction I subtract from gross receipts?
A: No. It is a threshold. Under $150,000 (each component) means no tax; at $150,000 or more on either component, there is no $150,000 deduction.

Q: If I owe no tax, do I still file?
A: Yes. You must file an abbreviated information report and a completed, signed Public Information Report.

Q: How are gross receipts everywhere computed for each component?
A: Taxable capital uses GAAP-method revenues (or the elected federal income tax method, Rule 3.549(e)); earned surplus uses revenues recognized for federal income tax purposes (Rule 3.557(b)(4)).

Citations and references

Rules:

• 34 Tex. Admin. Code Sec. 3.549(b)(5) and Sec. 3.549(e) (Franchise Tax Rule 3.549) - taxable-capital gross receipts under the GAAP or elected federal income tax method
• 34 Tex. Admin. Code Sec. 3.547(c)(1) (Franchise Tax Rule 3.547) - revenues under the reporting method
• 34 Tex. Admin. Code Sec. 3.557(b)(4) (Franchise Tax Rule 3.557) - earned-surplus receipts based on federal income tax revenues

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200012944L

Original ruling text

December 8, 2000

From: "Jeffcoat, Bob"
Subject: New Question on Franchise Tax
To: XXXXXXXXXXX

Dear XXXXXXXXXXX:

In your e-mails you asked about the computation of gross receipts everywhere
for each component of the franchise tax and the application of the $150,000
"exemption."

First, for franchise tax reports originally due on or after January 1, 2000, a
corporation will not owe any franchise tax if the amount of its gross receipts
from its entire business for both taxable capital and taxable earned surplus
are each less than $150,000 during the period upon which the tax is based. If
a corporation's gross receipts everywhere for either component are $150,000 or
more, the corporation is not allowed a $150,000 deduction from gross receipts
in computing the franchise tax.

Also, as in prior years, if the amount of tax computed is less than $100, there
will be no tax due. An eligible corporation will still need to file an
abbreviated information report along with a completed and signed Public
Information Report.

Second, the gross receipts everywhere for each component are computed as
follows:

(1) If a taxpayer reports taxable capital based on a generally accepted
accounting principles method, gross receipts are based on the revenues under
that method (Rule 3.549(b)(5) and Rule 3.547(c)(1)). If a taxpayer qualifies
and elects to file using the federal income tax method for taxable capital
purposes, the taxpayer computes gross receipts using the method on the federal
income tax return as outlined in Rule 3.549(e) (receipts using this method are
not necessarily the same as receipts for earned surplus due to exempt income,
etc.).

(2) For earned surplus purposes, receipts are computed based on the revenues
recognized for federal income tax purposes for the reporting period (Rule
3.557(b)(4)).

You can access the rules from the Comptroller's Web Site. After selecting
"Texas Taxes," you should select "Franchise Tax" then "Franchise Tax Rules."

Sincerely,

Bob Jeffcoat
Tax Policy Division