Help with Definition of Revenue

[equinecpa]

I'm asking this questions as I'm having trouble completing a Texas Franchise Return which is based on revenue.

My client has a lot of reimbursable expenses. They book this as revenue with a corresponding cost of sale.

Now I'm preparing the Texas Franchise return it would appear that the revenue gets included in the tax and the expenses are not eligible for cost of goods sold treatment so are not deductible.

Would it be incorrect to net the revenue and expense accounts on the Federal return and only include the net in revenue (this has no impact on federal figures but does have a major impact on state tax)? Basically I guess I'm asking if it is permissible to use a clearing account for reimbursable expenses?


Thanks

Carolyn

[taxea]

I would read the instructions from Tx for this type of return. In Hawaii this type of tax is based on gross income not net income. taxea

[Jiggers]

Texas Franchise

I think that the reimbursements must be included as part of revenue.

In my tax practice, a corporation in Texas, I bill clients for postage. This is included in my gross receipts. I take a deduction elsewhere for the postage expense.

[equinecpa]

[quote]I would read the instructions from Tx for this type of return[\quote]

The revenue is based on certain lines off of the federal return plus or minus some exceptions.

[quote]I think that the reimbursements must be included as part of revenue.[\quote]

I'm not so sure they "must". If a reimbursement is a direct reimbursement is it really revenue? I've gone through the federal rules and just can't find it spelled out.

[Edsel]

Gaap

Carolyn, unless there is something statutory addressed by Texas, I would consider using GAAP definitions as to what constitutes "Sales Revenue" versus casual reimbursements.

There are better sources than myself, but I would think that if a customers' selling price for a product, project, or activity includes the foresight of travel/meals, then Travel/Meals would be an expense, and Sales value would be revenue in the largesse. If there is a casual agreement for travel/meals to be reimbursed outside the normal customer relationship, this could be treated as a reimbursement, and "net out" on the books. One telltale sign of such an arrangement is that there is no profit built into the reimbursement -- it is a dollar-for-dollar reimbursement.

Be careful not to decrement meals for the 50% if your client is specifically being reimbursed, either via the selling price or a casual reimbursement. I would give you a Code/Reg § but my favorite Code website is blocking me at this computer.

[gman]

texas

I had trouble with the new Texas Franchise returns also. The rules seem unclear in several areas.

[Edsel]

Officers

Equinecarolyne, If you're not used to filling out Texas franchise returns, let me share with you an experience I had a few years ago.

I don't know whether things have changed since then, but Texas franchise return creates a portion of its tax by taxing the number of officers in the corporation. My contact was a small corporation with some $10MM in revenue, but its owner wanted his entire executive staff to be called "Vice-Presidents" so that the public would think they were dealing with someone who could be effective and service their needs. Sorta like a bank, where every employee is a vice-president except the tellers.

PriceWaterhouseCoopers was filling out the tax return, and the corporate accountant was asked to provide a list of officers. So PWC was sent a list of 15 officers, including all 12 vice-presidents. The tax return had a franchise tax of over $20,000 based on the number of officers' alone, and the owner asked me to look into it, since only about 4% of his operation was in Texas.

Easy solution. Not to put a feather in my hat by catching this obvious error, but only to warn you of what can happen if Texas still taxes in the same way.

[Jiggers]

Not in Texas

Equinecarolyne, If you're not used to filling out Texas franchise returns, let me share with you an experience I had a few years ago.

I don't know whether things have changed since then, but Texas franchise return creates a portion of its tax by taxing the number of officers in the corporation. My contact was a small corporation with some $10MM in revenue, but its owner wanted his entire executive staff to be called "Vice-Presidents" so that the public would think they were dealing with someone who could be effective and service their needs. Sorta like a bank, where every employee is a vice-president except the tellers.

PriceWaterhouseCoopers was filling out the tax return, and the corporate accountant was asked to provide a list of officers. So PWC was sent a list of 15 officers, including all 12 vice-presidents. The tax return had a franchise tax of over $20,000 based on the number of officers' alone, and the owner asked me to look into it, since only about 4% of his operation was in Texas.

Easy solution. Not to put a feather in my hat by catching this obvious error, but only to warn you of what can happen if Texas still taxes in the same way.

I don't know when this was, but I have been doing Franchise Tax Returns in Texas since 1982 and I have never seen where the tax was based on the number of officers.

The new state franchise tax is a bear. I have been to one seminar put on by the state and am looking at another one in the near future.

[Edsel]

Outside of Texas

Jiggers, this was in 2000, and was on the Franchise tax for a Foreign corporation, not a Texas-based corporation.