Question for Ray Alcorn, you said ... - Posted by JP

Real Estate Investing Real Estate Gurus
1

Posted by JP on July 31, 2003 at 19:39:53:

Thanks Ray. Yeah, Texas does still have the franchise tax … I need to read up on it in more detail. It’s something crazy like they tax you a percentage of your total capital, plus another small percentage of profits or something silly like that.

I did make a post in the legal forum looking to get John Hyre’s feedback on my particular situation, but no reply yet. It’s only been a few days and I know you, he and everyone else is really busy so I’ll just keep checking back. My regular CPA from back east is out of town and I just recently moved out here to Texas so I don’t have anyone here I can talk to yet - working on that too. As you know it’s hard to find “good” people …

2

Question for Ray Alcorn, you said … - Posted by JP

Posted by JP on July 30, 2003 at 19:42:51:

In a recent post you made in response to someone asking about where to setup his new corporation for investing, you said:

“As to the state of domicile for the entity, my preference is to use the state where the property is located… in your case Oklahoma, unless there is some quirk in the tax law (like TX) that makes it more expensive to do business that way.”

Can you elaborate on how/why Texas is different? Are you basically saying that if it was a Texas corporation it would pay more in taxes, and thus one would be better off using a Nevada corporation, etc?

I just recently relocated to Texas and I am trying to figure out exactly how to get things set-up for my investing here i.e. flips, etc. I currently have a Nevada corporation, and I’m trying to figure out if I should use that or set-up a new corp here, etc. so your insights would be most helpful. Thanks!

3

Re: Question for Ray Alcorn, you said … - Posted by Robert H. Turner

Posted by Robert H. Turner on August 02, 2003 at 16:50:48:

I own and operate properties in Texas. We specifically avoid the State Franchise Tax by using ONLY limited partnerships (even for operating companies). We use a Texas corporation as the general partner, but the 1.0% apportioned to it doesn?t produce enough to tax.

Here is an excerpt from the State Comptroller office pertaining to the franchise calculation:

How the Tax Is Computed
Corporations pay the greater of the tax on net taxable capital or net taxable earned surplus.

Taxable Capital
Taxable capital is a corporation’s stated capital (capital stock) plus surplus. Surplus means the net assets of a corporation minus its stated capital. For a limited liability company, surplus means the net assets of the company minus its members’ contributions. For more details on surplus, see Rule 3.551. Taxable capital is apportioned using a single gross receipts factor.

The tax rate on taxable capital is 0.25 percent per year of privilege period. For an explanation of “privilege period,” see Tax Code Sec. 171.151.

Earned Surplus
Earned surplus basically includes the corporation’s federal net taxable income, plus compensation paid to officers and directors of the corporation. S corporations and corporations with fewer than 36 shareholders are generally exempt from the compensation add-back. For the earned surplus calculation, unitary income is apportioned using a single gross receipts factor. Non-unitary income (with the exception of dividends and interest) is allocated to Texas if Texas is the corporation’s commercial domicile. For more information on the allocation of non-unitary income, see Rule 3.576.

NOTE: Dividends and interest are apportioned to the legal domicile of the payor.
The tax rate on earned surplus is 4.5 percent. For more information on the computation of earned surplus, see Rule 3.555.

No Minimum Tax
Corporations that owe less than $100 do not pay any tax. In addition, for reports due on or after January 1, 2000, corporations will not owe any tax if the gross receipts from their entire business for both taxable capital and taxable earned surplus are each less than $150,000 during the period upon which the tax is based. These corporations must file an abbreviated information report.

Robert

4

Re: Question for Ray Alcorn, you said … - Posted by ron

Posted by ron on August 01, 2003 at 14:17:23:

Hi JP and Ray,

TX (land of the free home of the brave) does levy the franchise tax on LLC’s. I have an LLC to collect rents manage properties, and trusts (with me personaly as the beneficiary) to hold property. Most of big boy’s hold property in limited partnerships. They cost more to set up but do not have to pay the franchise tax (for now we have a budget crisis and there is a small chance it could change)

Ron

If you are looking to invest in a MHP I am very interested in partnering up with a few investors to buy a MHP in TX email me

5

Re: Question for Ray Alcorn, you said … - Posted by ray@lcorn

Posted by ray@lcorn on July 31, 2003 at 15:08:29:

JP,

I should have clarified that comment about TX… things may have changed since I’ve done business there. Last time I checked (3 or four years ago), TX levied a “franchise tax” on LLCs that was onerous to real estate ownership. I don’t remember the details, but maybe some of our regulars from the Lone Star Republic will chime in and let us know if that is still the case. Also, check with your attorney and weigh the options of operating as a foreign entity in TX as compared to forming a domestic entity.

ray

p.s. John Hyre, host of the legal forum here on CRE Online, has spent a good deal of time in TX and is familiar with the requirements. He also specializes in entity selection based on your business plan. Put a post on his board for specific guidance.

6

But what if … - Posted by JP

Posted by JP on August 02, 2003 at 21:30:44:

That’s great if you want all the income to pass through to your own personal tax return, but that’s the last thing in the world I want. Hmm. I guess the partners of my Texas LP could be my other corps that don’t necessarily operate in Texas. Hmm…