Need Help with Texas Franchise Tax regarding COGS

[WhiteOleander]

New 1120S client. This is our first year preparing their return. The former preparer has become extremely ill and cannot work any longer.

The issue I am having trouble with is the TX Franchise return. This business is an auto repair business. So, they are basically a service business, not manufacturing. As I understand the state instructions, they are not eligible to use the COGS calculations since they don't produce any tangible property. The prior preparer used the COGS. He used the same figure reported on the 1120S w/o any adjustments. As I read the instructions, this is not allowed. The instructions state that everything deducted for federal purposes is not deductible for the state. Is there a hybrid type business where some COGS can be used.

The gross revenue is right at 3.6 mil. So, the tax is substantial. If we use the service industry rate, does that preclude us from using COGS?

Thanks for any help.

[Roland Slugg]

I was not familiar with the Texas Franchise Tax, so I reviewed the forms and read parts of the instructions.

An auto repair business sells parts, and those parts constitute its COGS. Thus, based on my reading of the forms and their instructions, I believe the corporation CAN use its revenue minus COGS to determine one of the four margin factors on lines 19-22 of Form 05-158. Figure all four margin factors, then the franchise tax is based on the lowest of the four. The tax rate if this form is filed is 0.95% (0.0095).

Since your client's gross receipts are less than $10M, it has the option of filing the EZ form instead, Form 05-169. If the EZ form is used, neither the COGS deduction is allowed nor are any of the others that are allowed on the "long form." The tax is based purely on gross receipts. The tax rate, however, is lower ... 0.575% (0.00575). Figure the tax both ways and use the reporting form that results in the lowest tax.

[Jiggers]

The Texas Franchise Tax System is a mess. I sure hope we never have a state income tax because our legislature will surely screw it up.

Here is a link to the instructions: http://comptroller.texas.gov/taxinfo...rms/05-903.pdf

COGS for the franchise tax return is not the same as COGS for the IRS!

I do several franchise tax returns, most are the "No Tax Due" return because of the gross receipts not exceeding the amount allowed.

The one corporation that I have to calculate a tax is using the COGS method. I have to recalculate the COGS. Really a pain and it takes me several hours to prepare this return.

The best bet is to print the instructions and read them in detail. Print some blank forms and work your client through all items to determine the method that produces the lowest tax.

[WhiteOleander]

Thanks for the responses. I usually only prepare the no tax due returns also. I do understand that the federal cogs figure cannot be used for the franchise return. The previous preparer did just that. So now we are facing a client that says we are doing it all wrong. Last year the franchise tax was approx. 2700.00. This year it is approx. 9800.00.

I wanted to see if anyone here had much experience on the cogs issue. The instructions are circular in my opinion. You can't really pin down actual definitions of what is/is not deductible.