Calling All Veterans: Texas Extends Hand with Generous Tax Exemption

by | Jul 17, 2023

In a move to foster entrepreneurship among veterans, the state of Texas has reinstated certain provisions under Senate Bill 938, granting new veteran-owned businesses a five-year tax break. The updated legislation, effective from January 1, 2022, offers an exemption from the Texas Franchise Tax to qualifying businesses.

Understanding the Texas Franchise Tax

The franchise tax in Texas is considered a privilege tax imposed on entities engaged in business within the state. This tax is calculated based on the company's margin and is apportioned amongst the states where the business operates through a formula determined by gross receipts. The exemption from this tax can provide substantial financial relief for new businesses, particularly for those whose revenue exceeds the exemption threshold, which currently stands at just over $1,200,000.

Eligibility Criteria

To qualify for this franchise tax exemption, businesses must meet a comprehensive set of criteria. The entity must be formed in Texas either between January 1, 2016, and January 1, 2020, or between January 1, 2022, and January 1, 2026. Businesses formed during the period between January 1, 2020, and December 31, 2021, are not eligible for this exemption.

Furthermore, the business must be 100% owned by natural persons who are honorably discharged veterans from any branch of the U.S. Armed Services. Each owner must be able to provide a Letter of Verification of Veterans Honorable Discharge, issued by the Texas Veterans Commission. The Texas Comptroller of Public Accounts is responsible for verifying this information. 

Process for Verification

For a new veteran-owned business to qualify for the five-year franchise tax exemption, there's a three-step verification process. Firstly, the business owners need to request a Letter of Verification of Veterans Honorable Discharge from the Texas Veterans Commission. Secondly, they must complete the Comptroller Form 05-904. Finally, they are required to submit their Formation/Registration and Verification Documents.

Impact of the Exemption

This provision is not merely a tax break; it is a significant step toward facilitating the transition from military service to entrepreneurship for veterans. However, if the business changes its status during the five-year exemption period and no longer meets the criteria, the owners are required to notify the Comptroller's office, after which the entity becomes subject to the franchise tax.

In conclusion, the Texas Franchise Tax exemption is a commendable initiative to support veteran-owned businesses. It provides a financial cushion that can boost the growth of these businesses during their early years. Entrepreneurs who own a new veteran-owned business in Texas should take full advantage of this opportunity and ensure they meet all the requirements to maintain their tax-exempt status.

If you are a veteran living in Texas and would like some more information on the new Texas franchise tax exemption, contact Freese, Peralez, & Associates today!