In its 2nd Special Session, Texas’ state legislature passed Senate Bill 3 (SB 3) which exempts 67,000 additional businesses from franchise tax obligations and removes the information return filing requirement for businesses that do not owe any franchise tax. The legislation passed nearly unanimously and will go into effect beginning in January 2024 pending voter approval in November.
The Budget Package
SB 3 was signed by Texas Governor Greg Abbott on July 22, 2023, concurrently with Senate Bill 2 (SB 2) and House Joint Resolution 2 (HJR 2) which were approved as a budget balancing package designed to allocate a major portion of the state’s historic $32.7 billion budget surplus back to Texas citizens and business owners.
Senate Bill 2 outlines how Texas will provide property tax relief through the public school finance system, exemptions and limitations as well as the imposition of a new filing fee for items placed on voting ballots (Section 6.032). The effective dates of some provisions will begin as early as October 12, 2023, while others will become effective a several year period (SB 2 Effective Date section).
Texas does not impose state level property taxes. Property tax relief through SB 2 provides measures that will reduce the appraised value of properties and provide exemptions, thereby lowering individual and business tax liability.
Authorizing the Texas legislature to establish property and franchise tax adjustments requires HJR 2 that will amend the Texas Constitution for the specific temporary and permanent changes covered in the two Senate Bills. Changing the state’s constitution requires voter approval, which is anticipated to occur on November 7, 2023 through the passage of Proposition 4.
Details for Business Owners
Franchise tax relief included in SB 3 comes from raising the exemption threshold from $1 million to $2.47 million. Based on each entity’s entire business revenue over a 12-month period, those who earn less than $2.47 million in total revenue will no longer be required to pay franchise taxes beginning in 2024. They—along with others that were previously under the $1 million threshold—will be relieved of the administrative burden and will no longer be required to file franchise tax information returns in the state of Texas beginning in 2024.
The primary winners of SB 2 are individuals who own residential property. They will benefit from the mandatory $100,000 homestead exemption— $110,000 for those 65 and over—on school district property taxation. Texas Lt. Governor Dan Patrick anticipates that the average homeowner will receive a yearly permanent tax cut of $1,250 to $1,450 for as long as they live in a homestead property. The reduced property tax burden may ease recruiting challenges and business owners can benefit when the funds saved are spent within the local economy.
A temporary 3-year appraisal limit within SB 2 will cap growth on appraised value for non-homestead property to 20 percent per year when the appraisal value is less than $5 million.
Next Steps
It’s fantastic to see small to medium-sized businesses benefiting and being relieved from filing and paying franchise taxes. The property tax gains are less direct for business owners, but the net tax relief to businesses—as well as homestead owners—should allow additional funds to flow in the Texas economy.
To comply with the new legislations, the challenges ahead for Texas business owners are to ensure their continued compliance with all regulations during the transition to the new rules and to take stock of their unique circumstances so that they will receive all tax benefits and exemptions that they’re entitled to.
Assigned valuation amounts, allocations, cut-off dates, cross-county sales and changes to your business can each affect your tax liability. Texas’ imposing 254 counties and over 1000 cities present windows for both unintentional errors as well as for opportunities when you’re ready to expand.
REDW State and Local Tax advisors are experts at analyzing tax regulations and applying them to our clients’ situations. Whether you’re considering a move to Texas or are already there, let REDW take the complexity of state and local tax off your to-do list. Contact us today using the How can we help? form on this page.
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