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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER VFRANCHISE TAX
RULE §3.589Margin: 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) Assigned employee--Has the meaning assigned by Labor Code, §91.001.

  (2) Client company--

    (A) a person that contracts with a license holder under Labor Code, Chapter 91, and is assigned employees by the license holder under that contract; or

    (B) a client of a temporary employment service, as that term is defined by Labor Code, §93.001(2), to whom individuals are assigned for a purpose described by that subdivision.

  (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). 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) Small employer--An entity defined in Insurance Code, §1501.002.

  (7) Staff leasing services company--A business entity that offers staff leasing services as that term is defined by Labor Code, §91.001, or temporary employment service as that term is defined by Labor Code, §93.001.

  (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) 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;

    (C) 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, a taxable entity that elects to subtract compensation (see subsection (i) in this section) for the purpose of computing its taxable margin under Tax Code, §171.101, 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.

    (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 per 12-month period on which the tax is based for any one person in wages and cash compensation it determines under Tax Code, §171.1013. See §3.590 of this title (relating to Margin: Combined Reporting).

    (B) For reports originally due on or after January 1, 2010, the taxable entity cannot subtract more than $320,000 (determined under Tax Code, §171.006) per 12-month period on which the tax is based for any one person in wages and cash compensation it determines under Tax Code, §171.1013. See §3.590 of this title; 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;

    (B) discounts on the price of the taxable entity's merchandise or services sold to the taxpayer's employees, officers, or directors, partners, or owners that are not available to other customers;

    (C) 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); and

    (D) working condition amounts provided so employees can perform their jobs. (Examples of working condition benefits include an employee's use of a company car for business, job-related education provided to an employee, and travel reimbursement.)

  (3) The cost of benefits does not include the amount paid by an employee.

(f) Staff leasing companies. See §3.587 of this title.

  (1) A staff leasing company cannot include as compensation the following payments for assigned 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 company can include as compensation the following amounts for assigned employees:

    (A) wages and cash compensation; and

    (B) benefits.

  (3) A client company cannot include as compensation the following:

    (A) an administrative fee;

    (B) payments made to a staff leasing company as reimbursement for payments made to independent contractors assigned to the client company 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 staff leasing company shall determine compensation only for the taxable entity's own employees who are not assigned 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. A taxable entity must make an annual election to subtract compensation in computing margin by the due date or at the time the report is filed, whichever is later. The election to subtract compensation is made by filing the franchise tax report using the compensation method.

  (1) After the due date of the report, an amended report may not be filed to change the method of computing margin from the compensation deduction to the cost of goods sold deduction.

  (2) An amended report may be filed to change the method of computing margin from the compensation deduction to 70% of total revenue or, if qualified, the E-Z Computation.


Source Note: The provisions of this §3.589 adopted to be effective January 1, 2008, 32 TexReg 10038; amended to be effective January 1, 2009, 33 TexReg 10504; amended to be effective December 31, 2009, 34 TexReg 9471

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