USA – TEXAS Law and Practice Contributed by: Perrin Clark, Ytterberg Deery Knull LLP
Franchise Tax For the privilege of doing business in the state, Tex - as assesses a franchise tax on each taxable entity formed or organised in Texas, or doing business in Texas. Texas has an expansive interpretation with respect to “doing business in Texas”, including any contact with Texas that creates a sufficient nexus to allow state taxation pursuant to the US Constitution. The tax base is the entity’s margin, and margin can be calculated as: • 70% of total revenue; In 2025, no tax is due on total revenue less than USD2.47 million. The tax rate is 0.75%, though this is reduced to 0.375% for retail and wholesale, and there is an “EZ Computation” if total revenue is over USD20 million that applies a rate of 0.331%. 1.2 Exemptions The US federal combined lifetime gift and estate tax exemption for 2025 is USD13.99 million. Under cur - rent law, this will increase to USD15 million in 2026 and thereafter, it will be subject to a mechanism for annual inflation adjustments. The lifetime exemption is available to both US citizens and non-citizen domi - ciliaries. A non-citizen non-domiciliary has no lifetime gift tax exemption and has an estate tax exemption of only USD60,000 with respect to their US situs prop - erty. However, all persons, whether they are citizens, non-citizen domiciliaries, or non-citizen non-domicili - aries, have a lifetime generation-skipping transfer tax exemption of USD13.99 million in 2025 (which, simi - larly, will increase to USD15 million in 2026, thereafter subject to annual inflation adjustments). All persons have an annual exclusion from gift tax (and, except with respect to transfers in trust, generation-skipping transfer tax) of USD19,000 per recipient in 2025, as well as unlimited exclusions with respect to gifts to a citizen spouse or to charity; provided the exclusion with respect to gifts to a non-citizen spouse is lim - ited to USD190,000 in 2025. Any transfer in excess of the relevant exemption or exclusion amount is sub - ject to the applicable transfer tax. See the discussion • total revenue minus cost of goods sold; • total revenue minus compensation; or • total revenue minus USD1 million.
regarding applicable US federal transfer taxes in 1.1 Tax Regimes . Since no state or local transfer taxes are assessed in Texas, there are no similar exemptions or exclusions at the state or local level. 1.3 Income Tax Planning Numerous strategies exist for planning with respect to US federal income tax. With respect to individu - als, highly appreciated assets can be held until death, at which point, their basis receives a step-up to fair market value, thereby reducing or potentially avoiding gain recognition on disposition and any associated tax on capital gains. In Texas, because it is a community property state, this tax benefit extends to a surviving spouse’s interest in the community estate, meaning that the surviving spouse’s one-half interest in com - munity property receives a similar step-up in basis on the death of the first spouse. Other income tax planning strategies include tax loss harvesting, private placement life insurance, qualified opportunity zones, Section 1031 exchanges, retire - ment account contributions, Roth conversions, invest - ments in municipal bonds, and tax residency planning (eg, moving to Texas), to name a few. No state or local income taxes are assessed in Tex - as; therefore, Texas is a very tax-favoured state with respect to income tax planning. Many persons have moved for income tax reasons to Texas from other states in recent years, particularly from New York, Illi - nois and California, each of which assesses substan - tial state and/or local income taxes. 1.4 Taxation of Real Estate Owned by Non- Residents Pursuant to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), any disposition of a US real property interest by a foreign person is subject to US federal income tax withholding of 15%. In addition, rentals from US real property are US source income and when earned by a non-resident alien are subject to US federal income tax withholding of 30%; pro - vided, if rentals are considered “effectively connected income”, they are reported on a US income tax return and are not subject to withholding.
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