SECTION 3.574. Margin: New Veteran-Owned Businesses

(a) Effective date. This section is effective January 1, 2016.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Beginning date--

(A) For a taxable entity that qualifies as a new veteran-owned business, the earlier of:

(i) the fifth anniversary of the date on which the taxable entity was chartered, organized, or otherwise formed in Texas; or

(ii) the date the taxable entity ceases to qualify as a new veteran-owned business.

(B) For example, if a qualifying entity files its certificate of formation with the secretary of state on June 1, 2016, and remains wholly-owned by honorably discharged veterans throughout its first five years of business, the entity becomes subject to franchise tax June 1, 2021. If one of the owners of this same new veteran-owned business sells his or her ownership percentage to anyone other than a qualifying veteran on December 31, 2017, the entity no longer qualifies as a new veteran-owned business and becomes subject to franchise tax January 1, 2018.

(2) Letter of Verification of Veteran's Honorable Discharge--A letter issued by the Texas Veterans Commission, upon request by a veteran, verifying the honorable discharge of the veteran.

(3) New business--A taxable entity that is chartered, organized, or otherwise formed in Texas on or after January 1, 2016, and before January 1, 2020.

(4) New veteran-owned business--A taxable entity that is a new business in which each owner is a natural person who:

(A) served in and was honorably discharged from a branch of the United States armed forces; and

(B) provides verification to the comptroller of the person's service and discharge, as required by subsection (d) of this section.

(c) Tax not imposed. The franchise tax is not imposed on a taxable entity that qualifies as a new veteran-owned business until the earlier of:

(1) the fifth anniversary of the date on which the taxable entity was chartered, organized, or otherwise formed in Texas; or

(2) the date the taxable entity ceases to qualify as a new veteran-owned business.

(d) Verification. A taxable entity that qualifies as a new veteran-owned business must verify that it is owned entirely by qualifying veterans.

(1) Required documents. A taxable entity must submit the following documents as required in paragraph (2) of this subsection:

(A) a "Letter of Verification of Veteran's Honorable Discharge" from the Texas Veterans Commission for each owner of the business; and

(B) comptroller Form 05-904, Certification of New Veteran-Owned Business, or any successor to the form promulgated by the comptroller.

(2) Submission. A taxable entity must submit the required documents identified in paragraph (1) of this subsection to the:

(A) secretary of state, if the taxable entity is formed with the secretary of state on or after January 1, 2016; or

(B) comptroller, along with the appropriate comptroller franchise tax questionnaire, if necessary, if the taxable entity is not required to file a certificate of formation with the secretary of state.

(e) Reporting requirement for a new veteran-owned business. A taxable entity that meets all of the qualifications of a new veteran-owned business is required to file a No Tax Due Report for each reporting period that the franchise tax is not imposed on the taxable entity.

(1) A qualifying new veteran-owned business that fails to file a No Tax Due Report as required shall pay a penalty of $50 under Tax Code, §171.362(f).

(2) A qualifying new veteran-owned business may not file with a combined group for each reporting period that the franchise tax is not imposed.

(3) A qualifying new veteran-owned business is not required to file a Public Information Report or an Ownership Information Report for each reporting period that the franchise tax is not imposed.

(f) Beginning date upon withdrawal of federal tax exemption. A qualifying new veteran-owned business that is exempt from franchise tax under Tax Code, §171.063 (Exemption for a Non-profit Corporation Exempt from Federal Income Tax) and subsequently has its federal tax exemption withdrawn by the Internal Revenue Service for failure to qualify or maintain its qualification for the exemption has a beginning date:

(1) as provided in subsection (b)(1) of this section if:

(A) in the absence of the federal tax exemption, the franchise tax would not have been imposed on the taxable entity under subsection (c) of this section; and

(B) the effective date of the withdrawal is before the beginning date determined under subsection (b)(1) of this section; or

(2) that is the effective date of the withdrawal, if either paragraph (1)(A) or (B) of this subsection does not apply.

(g) Expiration. The provisions of this section expire January 1, 2020; however, a business that first qualifies as a new veteran-owned business before January 1, 2020, continues to qualify as a new veteran-owned business as provided by this section.

Source Note: The provisions of this §3.574 adopted to be effective December 20, 2016, 41 TexReg 9938