A SURVIVOR'S GUIDE FOR SMALL BUSINESSES

Texas Franchise Taxes:

Texas has no income tax, but the State imposes an annual business tax on essentially all entities other than
sole proprietorships and general partnerships doing business in Texas. Affiliated entities may be required to
file a combined report and be taxed accordingly.

Annual reporting and payment of taxes, along with filing of the annual Public Information Report, is due by
May 15 of the following year. Initial report filing is due 89 days after the first anniversary of the entity’s
beginning date. There is no tax due if there are no gross receipts in Texas, if gross receipts everywhere are
less than a threshold amount (this seems to be a moving target that changes at the whims of our legislators),
or if certain other conditions are met. Reports must be filed, however, even if there are
no taxes owed or if the entity is inactive.

Basically, the tax is ½% (for wholesalers and retailers) or 1% (for all others) of apportioned gross margin,
which is defined as total revenue less the greater of: (1) cost of goods sold, (2) compensation, or (3) 30% of
total revenue. However, as defined for Texas franchise tax purposes, “total revenue”, “cost of goods sold”,
and “compensation” in your business may differ from the common usage of these terms or as defined for
federal income tax or financial statement purposes.

Go to www.window.state.tx.us/taxinfo/franchise (or, feel free to contact me) for additional information.

Payroll-related Taxes:

An employer is responsible for several types of taxes and reporting related to payroll. All payroll tax
reporting is based upon wages paid (cash basis) during a calendar year or quarter, regardless
of the business entity’s accounting basis or fiscal year end.

-IRS Form 941 is used to report amounts withheld from employee wages and the employer’s matching
share of Social Security and Medicare taxes for wages paid during a calendar quarter. Filing of Form
941 is due by the last day of the month following the end of each calendar quarter. Deposits of 941
taxes are due on a monthly, semiweekly or next-day basis, depending upon the amount of taxes
reported in the prior calendar year or upon the cumulative taxes owed. For more information, see
IRS Publication 15, available at www.irs.gov.

-TWC Form C-3 reports State of Texas unemployment taxes (SUTA) due on wages paid during each
calendar quarter. Taxes are assessed on wages paid up to an annual maximum of $9,000 of wages per
employee at a tax rate which is determined by the Texas Workforce Commission (TWC) based primarily
upon the entity’s prior experience. For new businesses, the initial rate is set at the greater of 2.7% or the
applicable industry average tax rate. Filing and remittance of taxes is due by the last day of the month
following the end of each calendar quarter. More information is available at www.texasworkforce.org.

-IRS Forms 940 or 940-EZ are utilized to report federal unemployment taxes (FUTA). Taxes are
assessed on wages paid during a calendar year up to a maximum of $7,000 of wages per employee.
The tax rate is 6.2%, with credit given for SUTA taxes (see above) paid up to a maximum credit of
5.4%. If all SUTA taxes are timely remitted, the net FUTA rate is 0.8%. Filing is due by January 31 of
the following year. Quarterly deposits are due by the last day of the month following each calendar
quarter in which the cumulative FUTA liability (including any unpaid liabilities from prior quarters) exceeds
$500. Annual taxes of less than $500 must be paid by the due date of the return. See IRS Publication 15,
available at www.irs.gov, for additional information.

-Form W-2 reports employee compensation, withholdings, and other required information on a calendar
year basis for each employee. The forms should be furnished to employees by January 31 of the following
year. Filing of Forms W-2 (and related transmittal Form W-3) is due with the Social Security Administration
by February 28 (for paper or magnetic media filing) or by March 31 (electronic filing). More information
can be obtained at www.irs.gov.

IRS Form 1099-MISC:

Form 1099-MISC is an annual information statement to report nonemployee compensation, rents, and
certain other payments made in the course of a trade or business during a calendar year. The general
reporting threshold is $600 for rents and services. Payments to corporations, except payments for legal
services and certain other specified transactions, are exempt from reporting requirements. Forms 1099
must be provided to recipients and filed (with related transmittal Form 1096) by February 28 (paper or
magnetic media filing) or by March 31 (electronic filing) of the following year. Additional information,
including information regarding other types of Forms 1099 and their filing requirements, are available
at www.irs.gov.

Sales and Use Taxes:

Sales taxes are imposed by the State of Texas and must be collected by the provider on all retail sales,
leases and rentals of most goods, and on taxable services rendered. Additional local taxes are imposed
by cities, counties, transit authorities, and special purpose districts. Taxes are also assessed on the purchaser
of taxable sales and services on which taxes were not collected by the provider (e.g., on internet purchases).
Tax rates, reporting and remittance requirements may vary widely depending upon the business’ location(s)
and qualifications. For more information, or to make online application for a sales tax permit and obtain an
information package for new businesses in Texas, go to http://www.window.state.tx.us/taxinfo/sales/

Personal Property Taxes:

Property taxes, including taxes on all personal property used in a business, are levied by local taxing units
in Texas. Personal property is all property, including inventory, which is not real property. Business
personal property owned, managed or controlled as a fiduciary on January 1 of each year must be
reported on Form 50-144 by April 15. Taxes are assessed based upon property values. Additional
information is available at www.window.state.tx.us/taxinfo/proptax/

Federal Income Taxes:

Corporations, including LLC’s electing to be taxed as corporations, file Form 1120 (Form 1120S if
a Subchapter-S corporation), which is due by the 15th day of the third month following the entity’s
fiscal year end (March 15 for calendar year corporations).

Partnerships and qualifying LLC’s file Form 1065, which is generally due by April 15 of the following
year. Unincorporated individuals, and single-member LLC’s which do not elect corporate tax treatment,
report their business operations on Schedule C of Form 1040 (also due April 15).

Federal income tax laws and regulations are complex, and I recommend that all business income tax
returns be prepared by a qualified tax professional.

I also recommend that a qualified professional be involved in the design of the accounting system and in
regular accounting activities on a monthly or quarterly basis. This involvement will promote proper and
timely accounting and allow effective tax planning throughout the year.