(a) Effective date. The provisions of this section
apply to franchise tax reports originally due on or after January
1, 2008, except as otherwise noted.
(b) Definitions. The following words and terms, when
used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1) Client--
(A) any person who enters into a professional employer
services agreement with a license holder; or
(B) any person who enters into an agreement with a
temporary employment service, as defined under Labor Code, §93.001(2)
(Definitions), for the purpose of having individuals supplement their
workforce.
(2) Covered employee--An individual having a co-employment
relationship with a professional employer organization and a client.
(3) Management company--A corporation, limited liability
company or other limited liability entity that conducts all or part
of the active trade or business of another entity (the managed entity)
in exchange for a management fee and reimbursement of specified costs
incurred in the conduct of the active trade or business of the managed
entity, including wages and cash compensation as determined under
Tax Code, §171.1013(a) and (b) (Determination of Compensation).
To qualify as a management company:
(A) the entity must perform active and substantial
management and operational functions, control and direct the daily
operations, and provide services such as accounting, general administration,
legal, financial or similar services; or
(B) if the entity does not conduct all of the active
trade or business of an entity, the entity must conduct all operations,
as provided in subparagraph (A) of this paragraph, for a distinct
revenue-producing component of the entity.
(4) Natural person--A human being or the estate of
a human being. The term does not include a purely legal entity given
recognition as the possessor of rights, privileges, or responsibilities,
such as a corporation, limited liability company, partnership, or
trust.
(5) Net distributive income--The net amount of income,
gain, deduction, or loss relating to a pass-through entity or disregarded
entity reportable to the owners for the tax year of the entity.
(6) Professional employer organization--A business
entity that offers professional employer services or a temporary employment
service.
(7) Small employer--A person who employed an average
of at least two employees but not more than 50 employees on business
days during the preceding calendar year, as defined under Insurance
Code, §1501.002 (Definitions). For purposes of this definition,
a partnership is the employer of a partner.
(8) Undocumented worker--A person who is not lawfully
entitled to be present and employed in the United States.
(9) Wages and cash compensation--
(A) the amount entered in the Medicare wages and tips
box of Internal Revenue Service Form W-2 or any subsequent form with
a different number or designation that substantially provides the
same information for the period on which the tax is based;
(B) any wages and cash compensation paid to employees
in a foreign country and reported on forms issued by the foreign company
that are substantially equivalent to the Internal Revenue Service
Form W-2;
(C) the amount of net distributive income (not to include
net distributive income that has been subtracted from total revenue),
regardless of whether cash or property pertaining to such income is
actually distributed and regardless of whether it is a positive or
negative amount, from one of the following entities to partners or
owners during the accounting period but only if the person receiving
the amount is a natural person:
(i) taxable entities treated as partnerships for federal
income tax purposes;
(ii) limited liability companies and corporations treated
as S corporations for federal income tax purposes; and
(iii) limited liability companies treated as sole proprietorships
for federal income tax purposes;
(D) stock awards and stock options deducted for federal
income tax purposes, to the extent not included in subparagraph (A)
of this paragraph.
(c) Compensation. Subject to Tax Code, §171.1014
(Combined Reporting; Affiliated Group Engaged in Unitary Business),
a taxable entity that elects to subtract compensation (see subsection
(i) of this section) for the purpose of computing its taxable margin
under Tax Code, §171.101 (Determination of Taxable Margin), may
subtract an amount equal to:
(1) subject to subsection (d) of this section, all
wages and cash compensation paid by a taxable entity to its officers,
directors, owners, partners, and employees up to the following thresholds
for any one person per 12-month period on which the tax is based:
(A) for reports originally due on or after January
1, 2008, but before January 1, 2010, the taxable entity cannot subtract
more than $300,000;
(B) for reports originally due on or after January
1, 2010, but before January 1, 2012, the taxable entity cannot subtract
more than $320,000;
(C) for reports originally due on or after January
1, 2012, but before January 1, 2014, the taxable entity cannot subtract
more than $330,000;
(D) for reports originally due on or after January
1, 2014, but before January 1, 2016, the taxable entity cannot subtract
more than $350,000;
(E) for reports originally due on or after January
1, 2016, but before January 1, 2018, the taxable entity cannot subtract
more than $360,000;
(F) for reports originally due on or after January
1, 2018, but before January 1, 2020, the taxable entity cannot subtract
more than $370,000;
(G) for reports originally due on or after January
1, 2020, but before January 1, 2022, the taxable entity cannot subtract
more than $390,000;
(H) for reports originally due on or after January
1, 2022, but before January 1, 2024, the taxable entity cannot subtract
more than $400,000; and
(2) subject to subsection (e) of this section, the
cost of all benefits the taxable entity provides to its officers,
directors, owners, partners, and employees.
(d) Compensation - excluded items. Compensation does
not include:
(1) payments made that are reportable on Internal Revenue
Form 1099 (or would have been reported if the amount had met the Internal
Revenue Service minimum reporting requirement);
(2) any expense excluded from total revenue and any
net distributive income subtracted from total revenue. See §3.587
of this title (relating to Margin: Total Revenue);
(3) an employer's share of payroll taxes;
(4) wages or cash compensation paid to an employee
whose primary employment is directly associated with the operation
of a facility that is located on property owned or leased by the federal
government and managed or operated primarily to house members of the
armed forces of the United States. See §3.587 of this title;
and
(5) wages or cash compensation paid to undocumented
workers.
(e) Benefits. A taxable entity is allowed to subtract
the cost of all benefits to the extent deductible for federal income
tax purposes that it provides to its officers, directors, owners,
partners, and employees.
(1) The term "benefits" includes employer
contributions made to:
(A) employees' health savings accounts;
(B) health care (for example, this would include contributions
to the cost of health insurance);
(C) retirement; and
(D) workers' compensation.
(2) The term "benefits" does not include
the following:
(A) amounts included in the definition of wages and
cash compensation; and
(B) payroll taxes. (For example, "payroll taxes"
would include payments to state and federal unemployment compensation
funds and payments under the Federal Insurance Contributions Act,
Chapter 21 of Subtitle C of the Internal Revenue Code, §§3101
- 3128, the Railroad Retirement Tax Act, Chapter 22 of Subtitle C
of the Internal Revenue Code, §§3201 - 3233).
(3) The cost of benefits does not include the amount
paid by an employee.
(f) Professional employer organizations. See §3.587
of this title.
(1) A professional employer organization cannot include
as compensation the following payments for covered employees:
(A) wages and cash compensation;
(B) payroll taxes;
(C) employee benefits including workers' compensation;
and
(D) payments made to independent contractors and reportable
on Internal Revenue Service Form 1099 (or would have been reported
if the amount had met the Internal Revenue Service minimum reporting
requirement).
(2) A client can include as compensation the following
amounts for covered employees:
(A) wages and cash compensation; and
(B) benefits.
(3) A client cannot include as compensation the following:
(A) an administrative fee;
(B) payments made to a professional employer organization
as reimbursement for payments made to independent contractors assigned
to the client and reportable on Internal Revenue Service Form 1099
(or would have been reported if the amount had met the Internal Revenue
Service minimum reporting requirement); and
(C) other costs.
(4) A professional employer organization shall determine
compensation only for the taxable entity's own employees who are not
covered employees.
(g) Management company. See §3.587 of this title.
(1) A taxable entity that is a management company may
not include as wages and cash compensation any amounts reimbursed
by a managed entity.
(2) A taxable entity that is a managed entity may subtract
wages and cash compensation that are reimbursed to the management
company.
(3) A management company shall determine compensation
for only those wages and compensation payments that are not reimbursed
by a managed entity.
(h) Small employers. This subsection applies to a taxable
entity that is a small employer and that has not provided health care
benefits to any of its employees in the calendar year preceding the
beginning date of its reporting period. Subject to Tax Code, §171.1014,
a taxable entity to which this subsection applies that elects to subtract
compensation for the purpose of computing its taxable margin under
Tax Code, §171.101, may subtract the following health care benefits:
(1) amounts as provided under subsection (c) of this
section;
(2) for the first 12-month period on which margin is
based and in which the taxable entity provides health care benefits
to all of its employees, an additional amount equal to 50% of the
cost of health care benefits provided to its employees for that period;
and
(3) for the second 12-month period on which margin
is based and in which the taxable entity provides health care benefits
to all of its employees, an additional amount equal to 25% of the
cost of health care benefits provided to its employees for that period.
(4) The term "provide" does not include amounts
paid by the employee, officer, director, etc.
(i) Election to subtract compensation. The election
to subtract compensation is made by filing the franchise tax report
using the compensation method or by amending any report filed within
the statute of limitations. A taxable entity may file an amended report
for the purpose of correcting a mathematical or other error in a report,
or to change its method of computing margin.
(j) Expenses paid with qualifying loan or grant proceeds.
A taxable entity may include in compensation any expense paid using
the qualifying loan or grant proceeds, as defined under Tax Code, §171.10131
(Provisions Related to Certain Money Received for COVID-19 Relief),
to the extent the expense is otherwise includable as compensation
under this section, even if the taxable entity has excluded the qualifying
loan or grant proceeds from its total revenue under §3.587 of
this title.
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