No-tax-due forms (which is what most companies file) MUST be filed electronically.

The 2023 extension deadline is Monday, May 15, 2023.

You may have received some letters from the Texas Comptroller’s office referring to “Texas Franchise Tax.” This sounds like something intended for the owners of Subway or T-Mobile retail franchise stores. Can you ignore them? Not at all! The “franchise” term applies to ANY legal entity registered to do business in the Lone Star State, including real estate investors.

So, what does Texas want from you today? In a nutshell (“nut” is an appropriate word here), here is the answer:

• If you have no business, or if your business is not registered with the state of Texas, or if you only have a DBA – Doing Business As (officially called an “assumed name”) – do not worry about this Franchise tax; it does not apply to you.
• If you are registered with the State of Texas as an LLC, a partnership, or a corporation – you must submit annual reports to the State of Texas. Usually, the deadline is May 15, but this year that’s a Sunday so the deadline is the following business day – Monday, May 16. Keep reading for instructions on filling out the Franchise forms.
• If your registered business is having enough gross receipts (roughly, we’re talking $1,000,000 or more in sales) – you may owe Texas some money.

Single-member LLC warning: You probably know that one-person LLCs and husband-wife LLCs, both called “single-member LLC” are exempt from IRS reporting. But this is Texas, not the IRS! All LLCs must file a Texas Franchise tax report, even single-member LLCs.

Gross receipts warning: The tax is based on gross receipts and has very little to do with your expenses. It is about volume, not profitability.

Landlord warning: For the Franchise Tax, you count gross rents, before any expenses. This is totally different from the IRS tax! Your apartment complex may show zero tax to the IRS, but you may still owe Texas Franchise tax which does not let you offset rent with expenses.

“Who cares” warning: You should care. Even if you do not owe any money, you owe Texas a couple pieces of paper. If you do not submit those, the state will soon place you in “bad standing” with the state. You will learn about the consequences when you visit your bank for a loan and they turn you down – or when they freeze your business account.

Definition of “passive” entity:

• General or limited partnership
• 90% of income comes from interest, dividends, royalties, partnership income distributions, gains from real estate sales, etc.
• But not from active trade or business and not from rent

Filing simple Texas Franchise tax forms

One confusing term to clarify: Margin Tax. There is no such thing as “Margin Tax.” This term refers to the Franchise Tax, since the current rules are based on a calculation called “margin.” However, officially, it is still called Franchise Tax.

Step 1 – Are you subject to Franchise Tax?

If you have no business entities at all or you have only a DBA (Doing Business As) – you can forget about the whole thing. Otherwise, you must file if you own one of the following business entities:

• LLC (Limited Liability Company), even single-member LLC
• Corporation (either C-corporation or S-corporation)
• LP (Limited Partnership)
• FLP (Family Limited Partnership)

Warning: Even if you do not owe any tax, you still MUST file two reports. Yes, even if your company was not doing anything! Otherwise, your business entity will become “not in good standing” with the State of Texas. It means that you will have problems with banking, with getting a loan, and will probably lose your legal liability protection. This is serious stuff!

Step 2 – Are you ready to file or do you need an extension?

If your company did absolutely nothing last year – you still need to file the report with all zeroes. It’s really easy– please follow the detailed instructions below.

If your company did at least some business last year – meaning it sold a property or collected some rent or received some other money – you will need to put numbers on your Franchise Tax Report. It does not matter whether or not your business was profitable. All you are asked here is: did your business receive any money during last year? If yes – you need numbers. These numbers come from your IRS tax return. If your IRS return is not ready by May 16, you need to file a Franchise Tax extension.

Do not skip the extension! There are penalties! Franchise extension gives you time until November 15 while keeping you in good standing with the State of Texas.

Completing an Extension Request is a no-brainer. Go to Step 5 below for information on how to access the forms and obtain whatever little information is needed for the extension.

Step 3 – Determine your “Total Revenue” (TR)

The instructions below are simplified and do not cover all possible situations. You may need to modify the calculations suggested below, so use them for an estimate only. For more detail, consult the official Franchise Tax Report instructions.

• If your company did not do any business – your TR is $0
• If you have a single-member LLC or husband-wife LLC that holds rental properties, your business is reported on Schedule E of your Individual tax return – Form 1040. Your TR will be your total rent, found on line 3 of Schedule E, in the “Totals” column. If you sold a rental, add to the total rent line 17 from Form 4797 – “Sales of Business Property.”
• If you have a single-member LLC or husband-wife LLC that does business other than rental properties, your business is reported on Schedule C of your Individual tax return – Form 1040. Your TR will usually be line 3 of Schedule C.
• If you have an LP, an FLP, or a multi-member LLC (other than husband-wife) – your company files a Federal Partnership tax return – Form 1065. Your TR is the total of the following lines from Form 1065: lines 1c, 4, 6, 7. To that number, add lines 3a and lines 5 thru 11 from Schedule K of Form 1065. Finally, if your partnership holds rental properties, add line 17 from Form 8825.
• If you have an S-corporation – your company files a Federal S-corporation tax return – Form 1120S. Your TR is the total of the following lines from Form 1120S: lines 1c, 4, 5. To that number, add lines 3a and lines 4 thru 10 from Schedule K of Form 1120S. Finally, if your S-corporation holds rental properties, add line 17 from Form 8825.
• If you have a “regular” C-corporation – your company files a Federal C-corporation tax return – Form 1120. Your TR is the total of the following lines from Form 1120: line 1c and lines 4 thru 10.

Step 4 – Determining the Industry code

The new forms require you to enter a 6-digit NAICS code (North American Industry Classification System code).

Below is a list of the most common codes for real estate investors – residential only. Commercial real estate uses different codes. If you do not see yours on the list, please do your own search using the link above.

Step 5 – Where and how to file

No-tax-due forms (which is what most companies file) MUST be filed electronically.

File the reports online, using the WebFile service from the Comptroller.

If you have previously filed Franchise tax reports online, you need to remember your password. If this will be your first time, than you will need to set up an account – which requires two numbers: your 11-digit state Taxpayer number (different from the Federal EIN used for the IRS!) and WebFile number, starting with letters “XT” and followed by 6 digits. Both numbers should be at the top of a 1-page letter sent to you by the State Comptroller early in the year.

If you do not know your number, you can find it online by searching your company name in the Texas Entities Database.

If you do not have the Comptroller’s letter or do not remember your WebFile password – call 1-800-252-1381 for help.
Generally, you need to file two forms: one reports income, and the other reports owners.

There are 3 versions of Tax Report forms, from simplest to the most frustrating:

• • • No Tax Due Information Report
    • EZ Computation Report
    • Long Form Report

If your Total Revenue calculated in Step 3 is less than $1,000,000 – you owe zero tax, and you can follow the rest of these instructions to file a “No Tax Due Information Report.” Otherwise, I suggest that you file for an extension and seek professional help.

To make things even more stressful, the rules require aggregate reporting for so-called “combined groups” of entities. These rules are extremely confusing. If you have multiple entities for your real estate business – I strongly suggest you consult a tax expert. This is not a do-it-yourself project.

Step 6 – Completing the No Tax Due Information Report

• Report year: 2023 – entered automatically
• Privilege period: 01/01/2023 – 12/31/2023 – entered automatically. Yes, it should be 2022, the current year.
• Due date: 05/15/2023 – entered automatically
• NAICS code: see Step 4 above. This code is required.
• Accounting year: 01/01/22 – 12/31/22. Yes, it should say 2022, the prior year – except for recently created entities.
• Total Revenue: determined during Step 3 above.

The Yes-No boxes should normally all by “No” except the one that says Is this entity’s annualized total revenue below the no tax due threshold?. Assuming that you are indeed under the $1 mil threshold – see Step 3.

You also answer “Yes” to Does the entity have zero Texas Gross Receipts? if you had zero income.

Step 7 – Completing Public Information Report – Form 05-102 or Ownership Information Report – Form 05-167

A Public Information Report is required for all LLCs and corporations. For corporations, list all officers and directors. For LLCs that are professionally managed, list all managers. For LLCs managed by members, list all members.

An Ownership Information Report is required for all partnerships. List all general partners plus all limited partners who have at least 10% ownership. By “FEI number” they mean the federal tax ID: EIN for companies or SSN for individual partners.

You may view the previously filed report in the Texas Entities Database. Just search by company name and click on the “Officers and Directors Information” button. While there, you will also see:

• Taxpayer number
• File number
• Address on file
• Registered agent and registered office