Texas enacted Senate Bill (SB) 1243 on May 23, 2023. It impacts Texas franchise tax calculations by allowing taxpayers to:
- Exclude qualifying broadband grant proceeds for the purpose of broadband deployment from their total revenue
- Include expenses incurred to deploy broadband in the taxpayer’s cost of goods sold (COGS) or compensation deductions
What Is the Texas Franchise Tax and How Is It Calculated?
The Texas franchise tax is a privilege tax imposed on each business located or incorporated in Texas or doing business in Texas. The tax base that Texas uses to calculate the franchise tax is the business’s margin. The starting point to calculate margin for Texas franchise tax purposes is total revenue as reported on the federal income tax return. Margin is the lesser of the following:
- Total revenue minus COGS
- Total revenue minus compensation
- 70% of total revenue
- Total revenue minus $1 million
The margin is then apportioned to Texas using a single receipts factor to determine the tax base. For taxpayers primarily engaged in retail or wholesale trade, the tax base is multiplied by a 0.375% tax rate. For taxpayers not engaged in retail or wholesale trade, the tax base is multiplied by a 0.75% tax rate.
What Are Qualifying Broadband Grant Proceeds for Purposes of Deployment?
Qualifying broadband grant proceeds are federal or state funds received by a business from a broadband grant for broadband deployment in Texas. SB 1243 only applies to proceeds from a qualifying broadband grant.
Qualifying Broadband Grant Programs
Some enumerated qualifying broadband grant programs include:
- Broadband Equity, Access, and Deployment Program
- State Digital Equity Capacity Grant program
- Digital Equity Competitive Grant program
- Middle mile grants under 47 US Code 1741
Impacts of Qualifying Broadband Grants
After receiving qualified broadband grant proceeds, your business may be able to exclude the grant proceeds from your total revenue. A taxpayer’s COGS and compensation deductions aren’t reduced for excluded grant proceeds.
Combined, these provisions may allow you to both reduce the starting point and increase the deductions used to calculate taxable margin, resulting in a lower Texas franchise tax liability.
We’re Here to Help
For more information on the passage of Texas SB 1243, the exclusion of broadband grant proceeds, whether your business has received qualifying grant proceeds for broadband deployment, and how this bill may affect you, please contact your Moss Adams professional.