This month, the Texas legislature passed a sweeping bill to provide $18 Billion in tax cuts for Texas homeowners and small businesses. The tax cut, which provides relief against rising property values, would be the largest of its kind for the Lone Star State. Governor Abbot signed the tax package, making good on his promise to give back part of the state’s $33 Billion budget surplus. Voters must approve the bill in November before it becomes effective for the 2023 tax year.
What are the key parts of the bill?
The central piece of the legislation is Senate Bill 2 (SB2), which focuses on
property taxes. First, it provides about $12.6 Billion to reduce school property taxes by lowering tax rates 10.7 cents for every $100 in appraised property value. It also allocates an estimated $5.3 Billion towards the homestead exemption, which would increase from $40,000 to $100,000 for most homeowners. Finally, SB2 includes a provision that would cap the annual growth of tax bills for commercial and non-homestead properties to 20%. However, this last provision would only apply to properties worth $5 million or less, and the program would expire by the end of 2026.
How does the legislation impact small business owners?
Texas lawmakers also passed Senate Bill 3 (SB3), which increases the franchise tax threshold for businesses. Specifically, the proposal would double the annual revenue threshold from $1.23 to $2.47 million. This would provide relief to small businesses, who have additional tax and filing requirements if they exceed this threshold.
What is the Texas Franchise Tax?
The Texas Comptroller defines the tax as “a privilege tax imposed on each taxable entity formed or organized in Texas or doing business in Texas.” It applies to most business entities, such as corporations, LLCs, Partnerships, etc. In practice, the franchise tax works like an income tax for business, whereby tax rates are based on annual revenues. Importantly, if a company’s annual revenue falls below the current threshold of $1.23 million (soon to be $2.47 million), there is no franchise tax imposed, and a ‘No Tax Due’ report must be filed through the Comptroller’s website. This minimizes the tax burden and reporting requirements for many small businesses.
For more details on the Texas Franchise Tax calculation, please visit the Texas Comptroller website Franchise Tax Overview (texas.gov)