HB 3928 by Rep. Jim Keffer (R-Eastland) passed the House after a long debate on many proposed amendments. The amendments included provisions to reduce the required ownership provisions for combined groups from 80% to 50%, clarifications on employee leasing companies, a new tax credit for art donations and an anti-Sprint tax. Sprint is the cell phone company that adds a specific fee to the phone bill for the margin tax. The amendment doesn't prohibit that, but says any money so collected must be remitted to the state in addition to the company's franchise tax payments.
The debate on amendments included sparring between the two CPAs in the House, Rep. Carl Isett (R-Lubbock) and Rep. John Otto (R-Dayton). Isett offered an amendment to increase the small business exemption to $1.09 million and pay for it by switching from the "Joyce" to "Finnegan" method of determining which out-of-state taxpayers will be taxed in Texas. Otto opposed the bill claiming it would make it more difficult to attract business to Texas and explaining legal difficulties with the Finnegan method. For more, please click here to read the Dallas Morning News article.
The bill as passed also includes the following items:
- Raises the small business tax exemption from $300,000 to $600,000.
- Updates the references to the Internal Revenue Code to January 1, 2007.
- Taxable entities include limited liability companies.
- Family limited partnership references are eliminated as superfluous.
- Excludes certain non-profit trusts from taxation.
- States that being a corporate director is not tantamount to conducting an active trade or business.
- Entities doing business between June 1 and December 31, 2007 are subject to the revised franchise tax.
- Clarifies that retail electricity providers not involved in power transmission or distribution are primarily retailers.
- Technical studies or analyses of real property are identified as subcontractor payments excludable from total revenue.
- Tangible personal property includes live or taped radio and television programs.
- Conformity with federal tax reporting is required for depreciation and other items deductible as cost of goods sold.
- A combined group's margin cannot exceed 70% of total revenue.
- Benefits deductible as compensation must be deductible for federal income tax purposes.
- The $300,000 cash compensation cap applies at the combined group level.
- Cash compensation deductions for partnership distributions are limited to a total of $300,000 times the number of natural persons with a partnership interest.
- Combined group members are jointly and severally liable for the revised franchise tax.
- Members of a combined group must use the same tax reporting year.
- Tax calculations for tiered partnerships reporting as one entity is based on the total revenue of all relevant partnerships.
- A twenty year temporary credit is allowed based on operating loss carry forwards times 4.5%, deductible at 2.25% for the first ten years and 7.75% for the remaining ten years.
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