When do related businesses in Texas have to file a combined franchise tax return?

In Texas, two or more filed entities may need to file a combined franchise tax return if they meet certain criteria. The Texas franchise tax is a tax imposed on most types of filed entities operating in the state. The determination of whether companies should file a combined franchise tax return depends on their relationship and the ownership structure. Here are some key points to consider:

Entities have to file a combined franchise tax return if they are part of a Combined Group. A Combined Group is two or more taxable entities that are part of an affiliated group engaged in a unitary business under Texas Tax Code §171.1014.

Both Affiliated Group and Unitary Business are defined terms under the statutes and 34 Tex. Admin. Code §3.590.

Affiliated Groups:

An affiliated group consists of one or more entities that have a relationship through common ownership or control. There is a complex ownership and control test, found in Texas Tax Code §171.0001(8).

Unitary Business:

A unitary business is a single economic enterprise of affiliated entities that is sufficiently interdependent, integrated, and interrelated through their activities as to provide synergy and mutual benefit.

In determining whether a unitary business exists, the Texas Comptroller can consider any relevant factor, including whether:

(i) activities of the group members are in the same general line of business;

(ii) the activities of the group members are steps in a vertically structured enterprise or process; or

(iii) the members are functionally integrated through the exercise of strong centralized management.

The Texas Comptroller presumes that all affiliated entities are engaged in a unitary business unless/until they prove otherwise.

Reporting Responsibilities:

When filing a combined franchise tax return, the reporting responsibilities and calculations are consolidated for the affiliated group. The group reports its combined total revenue, deductions, and apportionment factors.

Separate Entity Reports:

If an affiliated group does not meet the requirements or chooses not to file a combined franchise tax return, each individual entity within the group must file separate reports.

Whether companies need to file a combined franchise tax return is a complex question with sometimes contradictory answers. Consulting with tax professionals who specialize in franchise tax reporting is essential to ensure your companies are in compliance. You can reach out to one of Sprouse Firm’s board-certified tax specialists to learn more.

Article by Beau Cross
Sprouse Shrader Smith PLLC