New veteran-owned businesses that meet certain criteria are entitled to an exemption from the franchise tax for up to five years after formation.
Texas calls its tax on business revenue a “franchise tax.” The Texas franchise tax is a privilege tax imposed on each taxable entity formed or organized in Texas or organized out of state and doing business in Texas (so-called “foreign” entities). The franchise tax is based on a taxable entity’s margin which is apportioned among the states where the company does business using a formula based on gross receipts.
How to Qualify
To qualify for the exemption, the business must be an entity formed or organized in Texas on or after January 1st, 2016, and before January 1st, 2020, be solely owned by a natural person (or persons), each of whom was honorably discharged from a branch of the United States Armed Forces; and can verify honorable discharge with a letter from the Texas Veterans Commission. The Texas Comptroller approves exemption requests by new veteran owned businesses.
What it Means
This exemption can provide a substantial tax break for your new business if your revenue exceeds the exemption threshold (presently just over $1,000,000). Depending on your taxable margins, the state will typically tax your business at a rate of 1%. Taxable margins are defined as the lowest number of the following three figures: 70% of total revenue; 100% of revenue minus cost of goods sold; or 100% of revenue minus total compensation.
If you would like to find out how your company can benefit from the veteran-owned exemption from the Texas franchise tax (or any of the other exemptions), contact us for more information.