Last year’s changes to the Texas Franchise Tax are expected to result in savings for approximately 26,000 small businesses, or one in four currently subject to the tax. The new rules apply to businesses with revenues between $1 million and $3.3 million, giving them the opportunity to deduct $1 million from their gross receipts in calculating their annual franchise tax obligations.
Companies with less than $1 million will remain exempt from the tax, but for those with greater revenues, the prior “tax cliff” has been softened, so that only the revenues in excess of $1 million are used in calculating the tax. Under prior law, earning even $1 over the $1 million threshold would subject all revenues to the tax, which sometimes gave companies with close to $1 million in revenue an incentive to stay beneath that threshold by making decisions to reduce reported revenues, such as pushing sales into the next year.
While obviously popular with small business owners who will see immediate tax savings, critics fear such changes will only further erode the state tax base, resulting in less funding for public services such as schools. Regardless of the politics involved, it is my opinion that the changes will help small businesses and get rid of nonsensical incentives, and for that, I feel the legislature got it right this time.