34 Tex. Admin. Code § 3.589 - Margin: Compensation
(a) Effective date.
The provisions of this section apply to franchise tax reports originally due on
or after January 1, 2008, except as otherwise noted.
(b) Definitions. The following words and
terms, when used in this section, shall have the following meanings, unless the
context clearly indicates otherwise.
(1)
Client--
(A) any person who enters into a
professional employer services agreement with a license holder; or
(B) any person who enters into an agreement
with a temporary employment service, as defined under Labor Code, §
93.001(2)
(Definitions), for the purpose of having
individuals supplement their workforce.
(2) Covered employee--An individual having a
co-employment relationship with a professional employer organization and a
client.
(3) Management company--A
corporation, limited liability company or other limited liability entity that
conducts all or part of the active trade or business of another entity (the
managed entity) in exchange for a management fee and reimbursement of specified
costs incurred in the conduct of the active trade or business of the managed
entity, including wages and cash compensation as determined under Tax Code,
§
171.1013(a) and
(b) (Determination of Compensation). To
qualify as a management company:
(A) the
entity must perform active and substantial management and operational
functions, control and direct the daily operations, and provide services such
as accounting, general administration, legal, financial or similar services;
or
(B) if the entity does not
conduct all of the active trade or business of an entity, the entity must
conduct all operations, as provided in subparagraph (A) of this paragraph, for
a distinct revenue-producing component of the entity.
(4) Natural person--A human being or the
estate of a human being. The term does not include a purely legal entity given
recognition as the possessor of rights, privileges, or responsibilities, such
as a corporation, limited liability company, partnership, or trust.
(5) Net distributive income--The net amount
of income, gain, deduction, or loss relating to a pass-through entity or
disregarded entity reportable to the owners for the tax year of the
entity.
(6) Professional employer
organization--A business entity that offers professional employer services or a
temporary employment service.
(7)
Small employer--A person who employed an average of at least two employees but
not more than 50 employees on business days during the preceding calendar year,
as defined under Insurance Code, §
1501.002(Definitions).
For purposes of this definition, a partnership is the employer of a
partner.
(8) Undocumented worker--A
person who is not lawfully entitled to be present and employed in the United
States.
(9) Wages and cash
compensation--
(A) the amount entered in the
Medicare wages and tips box of Internal Revenue Service Form W-2 or any
subsequent form with a different number or designation that substantially
provides the same information for the period on which the tax is
based;
(B) any wages and cash
compensation paid to employees in a foreign country and reported on forms
issued by the foreign company that are substantially equivalent to the Internal
Revenue Service Form W-2;
(C) the
amount of net distributive income (not to include net distributive income that
has been subtracted from total revenue), regardless of whether cash or property
pertaining to such income is actually distributed and regardless of whether it
is a positive or negative amount, from one of the following entities to
partners or owners during the accounting period but only if the person
receiving the amount is a natural person:
(i)
taxable entities treated as partnerships for federal income tax
purposes;
(ii) limited liability
companies and corporations treated as S corporations for federal income tax
purposes; and
(iii) limited
liability companies treated as sole proprietorships for federal income tax
purposes;
(D) stock
awards and stock options deducted for federal income tax purposes, to the
extent not included in subparagraph (A) of this paragraph.
(c) Compensation. Subject to Tax
Code, §
171.1014 (Combined
Reporting; Affiliated Group Engaged in Unitary Business), a taxable entity that
elects to subtract compensation (see subsection (i) of this section) for the
purpose of computing its taxable margin under Tax Code, §
171.101 (Determination of
Taxable Margin), may subtract an amount equal to:
(1) subject to subsection (d) of this
section, all wages and cash compensation paid by a taxable entity to its
officers, directors, owners, partners, and employees up to the following
thresholds for any one person per 12-month period on which the tax is based:
(A) for reports originally due on or after
January 1, 2008, but before January 1, 2010, the taxable entity cannot subtract
more than $300,000;
(B) for reports
originally due on or after January 1, 2010, but before January 1, 2012, the
taxable entity cannot subtract more than $320,000;
(C) for reports originally due on or after
January 1, 2012, but before January 1, 2014, the taxable entity cannot subtract
more than $330,000;
(D) for reports
originally due on or after January 1, 2014, but before January 1, 2016, the
taxable entity cannot subtract more than $350,000;
(E) for reports originally due on or after
January 1, 2016, but before January 1, 2018, the taxable entity cannot subtract
more than $360,000;
(F) for reports
originally due on or after January 1, 2018, but before January 1, 2020, the
taxable entity cannot subtract more than $370,000;
(G) for reports originally due on or after
January 1, 2020, but before January 1, 2022, the taxable entity cannot subtract
more than $390,000;
(H) for reports
originally due on or after January 1, 2022, but before January 1, 2024, the
taxable entity cannot subtract more than $400,000; and
(2) subject to subsection (e) of this
section, the cost of all benefits the taxable entity provides to its officers,
directors, owners, partners, and employees.
(d) Compensation - excluded items.
Compensation does not include:
(1) payments
made that are reportable on Internal Revenue Form 1099 (or would have been
reported if the amount had met the Internal Revenue Service minimum reporting
requirement);
(2) any expense
excluded from total revenue and any net distributive income subtracted from
total revenue. See §
3.587 of this title (relating to
Margin: Total Revenue);
(3) an
employer's share of payroll taxes;
(4) wages or cash compensation paid to an
employee whose primary employment is directly associated with the operation of
a facility that is located on property owned or leased by the federal
government and managed or operated primarily to house members of the armed
forces of the United States. See §
3.587 of this title; and
(5) wages or cash compensation paid to
undocumented workers.
(e) Benefits. A taxable entity is allowed to
subtract the cost of all benefits to the extent deductible for federal income
tax purposes that it provides to its officers, directors, owners, partners, and
employees.
(1) The term "benefits" includes
employer contributions made to:
(A)
employees' health savings accounts;
(B) health care (for example, this would
include contributions to the cost of health insurance);
(C) retirement; and
(D) workers' compensation.
(2) The term "benefits" does not
include the following:
(A) amounts included
in the definition of wages and cash compensation; and
(B) payroll taxes. (For example, "payroll
taxes" would include payments to state and federal unemployment compensation
funds and payments under the Federal Insurance Contributions Act, Chapter 21 of
Subtitle C of the Internal Revenue Code, §§3101 - 3128, the Railroad
Retirement Tax Act, Chapter 22 of Subtitle C of the Internal Revenue Code,
§§3201 - 3233).
(3) The cost of benefits does not include the
amount paid by an employee.
(f) Professional employer organizations. See
§
3.587 of this title.
(1) A professional employer organization
cannot include as compensation the following payments for covered employees:
(A) wages and cash compensation;
(B) payroll taxes;
(C) employee benefits including workers'
compensation; and
(D) payments made
to independent contractors and reportable on Internal Revenue Service Form 1099
(or would have been reported if the amount had met the Internal Revenue Service
minimum reporting requirement).
(2) A client can include as compensation the
following amounts for covered employees:
(A)
wages and cash compensation; and
(B) benefits.
(3) A client cannot include as compensation
the following:
(A) an administrative
fee;
(B) payments made to a
professional employer organization as reimbursement for payments made to
independent contractors assigned to the client and reportable on Internal
Revenue Service Form 1099 (or would have been reported if the amount had met
the Internal Revenue Service minimum reporting requirement); and
(C) other costs.
(4) A professional employer organization
shall determine compensation only for the taxable entity's own employees who
are not covered employees.
(g) Management company. See §
3.587 of this title.
(1) A taxable entity that is a management
company may not include as wages and cash compensation any amounts reimbursed
by a managed entity.
(2) A taxable
entity that is a managed entity may subtract wages and cash compensation that
are reimbursed to the management company.
(3) A management company shall determine
compensation for only those wages and compensation payments that are not
reimbursed by a managed entity.
(h) Small employers. This subsection applies
to a taxable entity that is a small employer and that has not provided health
care benefits to any of its employees in the calendar year preceding the
beginning date of its reporting period. Subject to Tax Code, §
171.1014, a taxable entity
to which this subsection applies that elects to subtract compensation for the
purpose of computing its taxable margin under Tax Code, §
171.101, may subtract the
following health care benefits:
(1) amounts as
provided under subsection (c) of this section;
(2) for the first 12-month period on which
margin is based and in which the taxable entity provides health care benefits
to all of its employees, an additional amount equal to 50% of the cost of
health care benefits provided to its employees for that period; and
(3) for the second 12-month period on which
margin is based and in which the taxable entity provides health care benefits
to all of its employees, an additional amount equal to 25% of the cost of
health care benefits provided to its employees for that period.
(4) The term "provide" does not include
amounts paid by the employee, officer, director, etc.
(i) Election to subtract compensation. The
election to subtract compensation is made by filing the franchise tax report
using the compensation method or by amending any report filed within the
statute of limitations. A taxable entity may file an amended report for the
purpose of correcting a mathematical or other error in a report, or to change
its method of computing margin.
(j)
Expenses paid with qualifying loan or grant proceeds. A taxable entity may
include in compensation any expense paid using the qualifying loan or grant
proceeds, as defined under Tax Code, §
171.10131 (Provisions
Related to Certain Money Received for COVID-19 Relief), to the extent the
expense is otherwise includable as compensation under this section, even if the
taxable entity has excluded the qualifying loan or grant proceeds from its
total revenue under §
3.587 of this title.
Notes
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