It is strictly a business matter as to what a Tenant is willing to pay or unwilling to pay. In Texas, almost every Landlord seeks to pass the “Margin Tax” along to Tenants. The discussion below will explain that it is not a real estate tax and is not a tax only on rental income. It is a Franchise Tax and is payable, according to a formula, based on an entity’s (not just a landlord entity’s) gross income. A manufacturer would pay it. A law firm organized as a limited liability company or professional corporation would pay it.
The “Margin Tax” is an income tax. The enabling Texas legislation calls it a Franchise Tax. The “public” calls it the Margin Tax because of the way it is calculated. It is a taxable on a taxable entity’s “taxable margin.” Prior to its passage, the Texas Franchise Tax applied only to corporations and limited liability companies. Limited partnerships were not taxed. Most real estate in Texas was held in the name of a limited partnership to avoid the pre-2008 Texas Franchise Tax.
So, when the Franchise (“Margin”) Tax was extended to limited partnerships, landlords began to pass this income tax on to Tenants. It is not a tax on real estate or even real estate owners. It is a tax on entities that afford limited liability protection to their owners. That is why it is not imposed on proprietorships or general partnerships.
Texas does not have a state income tax for individuals, but it does tax the profits of business entities according to the “margin tax” which is found at Chapter 71 of the Texas Tax Code.
Sec. 171.002(a) of the Texas Tax Code provides that the statutory maximum margin tax rate applicable to a taxable entity not engaged in retail or wholesale business is 1%. However, the maximum amount of gross revenues that is subject to the tax is 70%; therefore, in practical effect, this tax rate is 0.7%. Deductions may also apply to the extent that deductible compensation and other items comprise at least 30% of this “standard deduction.” This standard deduction has not changed.
No tax is due if the total tax liability is less than $1,000 or if total revenue falls beneath the “small business exemption,” which has been raised from $300,000 to $1,000,000 for the years 2010 and 2011. In 2012, the exemption will fall to $600,000.
Taxable entities include: a partnership, limited liability partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, and a holding company. Not included are sole proprietorships, general partnerships composed entirely of natural persons that do not have limited liability, a “passive entity,” and certain other specified entities.
Certainly, Landlords organized as limited partnerships, as is very common in Texas, were surprised to learn in 2008 that they would be paying a Franchise Tax (similar in effect to a gross income tax) on their pre-existing rental income. Once the tax took effect, they should have quoted rents that would satisfy their after-tax income objectives. Many, however, chose to try to pass this tax along to their Tenants. This might be likened to Landlords insisting on a Lease provision passing along increases in mortgage interest if they refinance their property.
Now dem’s “fighting words” and are intended to be such. I’m looking to provoke a response from the other side of the issue.