DAVID J. WILLIS ATTORNEY
Copyright © 2013. All rights reserved worldwide.
Texas Margin Tax
by David J. Willis
Attorney at Law
Texas does not have a state income tax for individuals, but it does tax the profits of business entities according to the "margin tax" which is found at Chapter 71 of the Texas Tax Code. The advent of the margin tax significantly complicates what used to be a relatively simple system of state taxation. This article summarizes some of the highlights of the margin tax. Beyond that, this office does not give tax advice. For a detailed analysis one should consult the Tax Code as well as a knowledgeable CPA.
Sec. 171.002(a) of the Code provides that the statutory maximum margin tax rate applicable to a taxable entity not engaged in retail or wholesale business is 1%. However, the maximum amount of gross revenues that is subject to the tax is 70%; therefore, in practical effect, this tax rate is 0.7%. Deductions may also apply to the extent that deductible compensation and other items comprise at least 30% of this "standard deduction." This standard deduction has not changed.
No tax is due if the total tax liability is less than $1,000 or if total revenue falls beneath the "small business exemption," which has been raised from $300,000 to $1,000,000 for the years 2010 and 2011. In 2012, the exemption will fall to $600,000.
Taxable entities include: a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, and a holding company. Not included are sole proprietorships, general partnerships composed entirely of natural persons that do not have limited liability, a "passive entity," and certain other specified entities. "Passive entity" is defined as an entity that (i) is a general or limited partnership or a trust other than a business trust, which (ii) during the relevant taxable period derived at least 90% of its federal gross income from capital gains from the sale of real property (this excludes short-term gains and ordinary income attributable to depreciation recapture); and (iii) during the relevant taxable period did not receive more than 10% of its federal gross income from rent.
Note that limited liability partnerships are now specifically listed as taxable entities. The old incentive for using this vehicle for real estate investment purposes has disappeared, at least from the perspective of state taxation.
The revised law contains a provision for deduction of health care costs for small businesses.
The foregoing has been a quick informational review and is no substitute for consulting with a qualified CPA.
Information in this article is proved for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well. This firm does not represent you unless and until it is expressly retained in writing to do so.
THIS DOCUMENT IS NOT INTENDED TO BE USED, NOR CAN IT BE RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES IMPOSED UNDER UNITED STATE FEDERAL TAX LAWS. THIS DOCUMENT DOES NOT CONSTITUTE DOES NOT CONSTITUTE A TAX OPINION OR OTHER ADVICE TO WHICH CIRCULAR 230 IS RELATED.
. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com. Copyright © 2013 by David J. Willis. All rights reserved