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Is Texas Franchise Tax Law Ready for an Overhaul?

One of the great things about being a business owner in Texas is the lack of a state income tax. One of the not-so-great things about being a business-owner in Texas is the franchise tax -- also called a margins tax.

In a meeting before the Texas House Ways and Means Committee, a number of business owners and others were asked to testify on the impact of the existing franchise tax law. According to news sources, some testified that it is time for a franchise tax law overhaul.

One of the issues is that the franchise is a tax on total revenue so that a business could have substantial revenue, but lose money, and still owe a significant franchise tax.

A few business owners complained about the fact that deducting an employee is allowed, but deducting a contractor is not. They reasoned that they are both work-hour expenses and should be treated similarly. For example, a trucking company hires mostly contractors as drivers. For one trucking company, being able to deduct the contract drivers would have changed his franchise tax from $100,000 down to $11,000.

Another issue had to do with equipment. Purchased equipment is a deductible expense, but leased equipment is not.

Many of those speaking before the committee expressed the desire for a simpler franchise tax plan. Some believe that capital-intensive businesses are being given an unfair tax advantage in comparison to smaller service industry types of businesses.

No changes will be made until at least January, when the state legislature convenes. Until then, businesses would be wise to make sure their franchise tax payments are according to current laws. Disagreeing with a law does not exempt one from following it.

Source: Star-Telegram, "Texas lawmakers review margins tax in hearing," Chris Tomlinson, June 5, 2012

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