With Texas’ new franchise tax looming,
is your practice prepared?

Remember the franchise tax the Texas Legislature passed in May 2006 as part of Gov. Rick Perry’s school finance reform plan? After several revisions, collection time is on the horizon—with the first returns assessed May 15, 2008—but several exemptions and deductions will lessen the financial impact on physicians.

From the beginning, the new tax plan replaced the franchise tax with a margins tax on all corporations, limited liability partnerships, professional associations and other business entities. The tax is calculated based on a business’ gross receipts minus the cost of goods sold or the cost of compensation and benefits paid to owners and employees, and minus allowable deductions. Businesses with taxable gross receipts less than $300,000 pay no tax, and those grossing less than $1 million will get discounts off of the standard tax rates, which are 0.5 or 1 percent, depending on the type of business.

Sole proprietorships and general partnerships in which all partnerships are individuals rather than business entities are exempt from the margins tax, meaning physicians in solo practice who are not organized as a PA will not be affected. Also exempt are physicians who practice in federally qualified non-profit organizations.

Practices organized as PAs, LLPs or other types of entities will be taxed, but can exclude certain revenues under rules published Dec. 28. Physician practices may exclude 100 percent of the revenues they receive for covered services they provide to beneficiaries in Medicare, Medicaid, TRICARE, the Children’s Health Insurance Program and workers’ compensation plans. Some limitations on these exclusions were included in the Dec. 28 rule but will be removed, according to a tax policy newsletter published by the comptroller in February.

Another exclusion is available for the actual costs of uncompensated care, calculated by multiplying the total uncompensated care charges by the ratio of total cost to total charges for the practice. The comptroller’s rules limit uncompensated care to exclude any services for which the physician received partial payment. Capturing and reporting this and other required information may require changes in the way information is recorded.

Deductible compensation expenses include wages, salaries and benefits with some limitations, but do not include contract-labor payments. Payments for temporary labor or to staff leasing companies and management companies get special treatment.

Because the tax is coming into effect for some but not all practices, and because the impact of the tax will be affected by various business decisions, it is important to confer with your practice’s accountant to understand the tax’s impact on your practice.