Governor Greg Abbott signs H.B. 32, further reducing tax burden for Texas businesses

Texas Governor Greg Abbott signed House Bill 32, the Franchise Tax Reduction Act of 2015, into law this month. The legislation permanently reduces the Texas Franchise Tax rate by 25%. The legislation will provide four main benefits for tax reports due originally on or after January 1, 2016:

  • The tax rate for businesses, other than retailers and wholesalers, will be reduced from 1.0 percent to 0.75 percent.
  • The tax rate of businesses primarily engaged as retailers or wholesalers will be reduced from 0.5 to 0.375 percent.
  • The tax rate for businesses that qualify for the EZ method of calculating the franchise tax will be reduced from 0.575 to 0.331 percent.
  • In addition, the act increased the threshold for businesses that may qualify for the EZ method by increasing the maximum revenue limit from $10 to $20 million.

According to Hein & Associates, under U.S. generally accepted accounting principles (GAAP), ASC 740-10-45-15 requires the effects of changes in tax rates and tax laws to be recognized in the period that the new legislation or law is enacted. This includes changes in the value of deferred tax assets and liabilities.

As a result of this new legislature, deferred Texas taxes reflected on the balance sheet could be reduced by 25 percent. The impact of this adjustment is included as a component of tax expense related to continuing operations in the first reporting period ended after June 30, 2015. For public companies, this will often be their quarter ended June 30, 2015.

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