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Tax Break Coming for Texas Small Businesses; Franchise Tax Basics

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By Caleb Groos on May 29, 2009 11:52 AM

Like many states, Texas is trying to find a way to aid struggling small businesses while also facing large budget shortfalls. If legislation passed by the Texas Senate becomes law, some small businesses would get temporary exemption from paying state franchise taxes. Anyone considering starting or moving a business should keep an eye on if and how different states adjust their treatment of business income taxes and franchise taxes.

Currently, Texas offers an exemption from franchise taxes for businesses with annual revenues under $300,000. As reported by the Fort Worth Star-Telegram, the bill passed by the Texas Senate would extend the exemption to businesses with revenues under $1,000,000 through the end of 2011. A competing House bill would extend it until 2012.

This move would extend the exemption to an estimated 132,000 additional businesses.

Franchise taxes are taxes levied by states on businesses organized under their laws. For example, in Texas, they apply to most business structures except sole proprietorships, general partnerships owned by an individual, and single owner LLCs that file as sole proprietorships.

States approach franchise taxes differently. They can be based on earnings, value of stock, and volume of business, amongst other factors.

Along with other considerations and taxes, businesses pondering which state to call home must consider the relationship between franchise taxes and business income taxes in any state.  Some states with high franchise taxes (like Delaware) don't tax the income of businesses chartered there but doing business out of state.

Other states have low or no franchise tax but tax business income.

With states hoping to save existing businesses and lure new ones, businesses considering a new start or a move should keep an eye on the wide variety of tax changes being considered in states across the country.

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