Businesses subject to the Texas franchise tax should review how they are calculating their margin base if they have foreign employees. Because Texas statutes make specific reference to IRS Form W-2 when discussing the wages and compensation deduction, businesses may assume that wages paid to foreign employees do not qualify for the deduction. In a recent Texas private letter ruling, the Texas Comptroller of Accounts ruled that amounts paid to employees in foreign countries may be eligible for the deduction.

Background

Texas imposes a revised franchise tax commonly referred to as the business margin tax. This tax is imposed on each taxable entity chartered/organized in Texas or doing business in Texas.   

Since January 1, 2014, an entity’s taxable margin base has been determined by computing the lesser of:

• 70 percent of the taxable entity's total revenue from its entire business;
• Total revenue minus $1 million;
• Total revenue from its entire business less cost of goods sold; or
• Total revenue from its entire business less compensation.

Wages and Compensation Deduction

As part of the compensation deduction, the Texas rules allow a taxable entity to subtract wages and compensation paid to its officers, directors, owners, partners, and employees, subject to certain wage limitations. 

“Wages and Compensation” is defined for Texas purposes to include (but is not limited to): “...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.”

Compensation Paid to Employees in International Offices

In Texas Private Letter Ruling #201510539L (Oct. 12, 2015), the question was raised whether “Wages and Compensation” paid to employees in international offices and reported on foreign government forms substantially equivalent to the IRS Form W-2 may be included in the compensation deduction.

The taxpayer was a global service company with offices in several countries. The taxpayer also paid wages and compensation to its employees in the foreign offices.

In addressing the question, the Texas Comptroller of Accounts determined that amounts paid to employees in foreign countries and reported on foreign forms substantially equivalent to the IRS Form W-2 qualifies as “Wages and Compensation” subject to the wage limitations contained in Tex. Tax Code Ann. § 171.1013(c).

Action Items

For those taxpayers who elected to determine their business margin tax using the compensation deduction in the past, or are considering such an election in the current tax year, amounts paid to foreign employees and reportable on forms substantially equivalent to the IRS Form W-2 are deductible. As such, prior returns should be reviewed for additional deductions which can be claimed if the compensation deduction was used in determining business margin tax while determining if additional foreign compensation deductions would generate less business margin tax in the current year.

If we can be of assistance in helping to make these determinations, please contact Jimmy Helms (864-241-0598) or Geoff Christian (864-241-2009) or your local CBIZ MHM tax professional.

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