Texas tax guide
How does the Texas franchise-tax exemption for new veteran-owned businesses work?
Texas treats a qualifying new veteran-owned business as not subject to franchise tax, and not required to file a Public Information Report or Ownership Information Report, for its initial five-year period. To qualify, the business must be formed or organized in Texas in an eligible period, be 100% owned by natural persons who are each honorably discharged veterans, and provide a Texas Veterans Commission Letter of Verification of Veteran’s Honorable Discharge for each owner, along with Comptroller Form 05-904.
Key takeaways
- The provision covers the initial five-year period of a qualifying new veteran-owned business.
- Eligible formation dates are January 1, 2016 through December 31, 2019, or January 1, 2022 and later, according to the Comptroller.
- Every owner must be a natural person and an honorably discharged veteran. One non-veteran owner, or an owner that is another company, disqualifies the business.
- The process has three steps: get a Veteran Verification Letter from TVC for each owner, complete Form 05-904, and file with the Secretary of State or the Comptroller depending on entity type.
- If the business stops qualifying during the five years, it must notify the Comptroller and becomes subject to franchise tax.
What the Texas franchise tax is
The Texas franchise tax is a state tax on many entities that do business in Texas, including most corporations and limited liability companies. Even entities that owe no tax generally have annual reporting obligations. For a new business, the reporting alone is an administrative task worth avoiding when the law allows it.
Texas Tax Code Section 171.0005 defines a new veteran-owned business, and Comptroller Rule 3.574 addresses how the franchise tax applies to these businesses. The Comptroller’s guidance explains the practical requirements summarized below.
Who qualifies
The Comptroller lists three requirements. All three must be met.
- Formation date: the entity must be formed or organized in Texas on or after January 1, 2016 and before January 1, 2020, or on or after January 1, 2022.
- Ownership: the business must be 100% owned by one or more natural persons, each of whom is an honorably discharged veteran of a branch of the U.S. Armed Services.
- Verification: the business must provide a Letter of Verification of Veteran’s Honorable Discharge issued by the Texas Veterans Commission for each owner.
Common reasons a business does not qualify
The 100% ownership rule is strict. A spouse who is not a veteran, a business partner who is not a veteran, or an ownership stake held by another company or trust means the business is not 100% owned by natural persons who are veterans. Plan ownership before you form the entity if this benefit matters to you.
Timing also matters. Entities formed between January 1, 2020 and December 31, 2021 fall outside the windows the Comptroller lists. And because the benefit applies to the initial five-year period, an older business that is new to veteran ownership does not automatically qualify. If your situation is unusual, contact the Comptroller before relying on the exemption.
Step 1: Get a Veteran Verification Letter from TVC
Each owner needs a Veteran Verification Letter (VVL) with a unique alphanumeric identification code from the Texas Veterans Commission. The Comptroller directs owners to the TVC website to connect with a business consultant, and states that a TVC Veteran Business Consultant will reach out within 72 business hours to request a DD-214 Member 4 or a VA benefits letter showing dates of service, branch, and character of discharge.
Watch for an email from an address ending in @tvc.texas.gov, and check junk folders. TVC publishes a VVL qualification guide; its program FAQ describes eligibility for the letter in terms of an honorable or general under honorable conditions discharge and a new business that is 100% veteran-owned. Confirm your specific situation with TVC.
Step 2: Complete Comptroller Form 05-904
Once every owner has a VVL, complete Form 05-904, Certification of New Veteran-Owned Business. The Comptroller states that you must enter each owner’s name, the unique identification code from their letter, their percentage of ownership, and their signature, using as many pages as needed to account for 100% of ownership.
Step 3: File with the right agency
Where you file depends on the entity type.
Entities that form with the Secretary of State, such as corporations, LLCs, limited partnerships, limited liability partnerships, and professional associations, file the VVL for each owner, Form 05-904, and the formation documents with the Secretary of State. If the entity is already formed, the formation documents are not required again. The Comptroller lists the Secretary of State’s mailing address on its veteran business page.
Other entity types that are subject to franchise tax but are not formed with the Secretary of State file the VVL for each owner, Form 05-904, and Form AP-224, Texas Business Questionnaire, with the Comptroller. The questionnaire is not required if the entity is already registered with the Comptroller.
Related fee relief
The Texas Veterans Commission states that a Veteran Verification Letter can also waive Secretary of State registration fees for a qualifying new 100% veteran-owned business, in addition to the franchise-tax treatment. Ask TVC or the Secretary of State which filing fees are waived for your entity type before you file, so you do not pay a fee you could have avoided.
During and after the five years
The Comptroller states that if, during the initial five-year period, a new veteran-owned business no longer meets the criteria, it must notify the Comptroller and becomes subject to franchise tax. Adding a non-veteran owner is the most common trigger.
Put the end of the five-year period on your compliance calendar. After the exemption period, the business will need to meet ordinary franchise-tax reporting requirements. A tax professional can help you plan for that transition.
How this fits with other veteran programs
This provision is a tax rule, not a procurement certification. It does not make a business a certified VOSB, SDVOSB, or VetHUB, and those programs do not grant this tax treatment. Each program has its own rules: SBA VetCert requires at least 51% veteran ownership and control, and VetHUB requires at least 51% ownership by Texas-resident service-disabled veterans.
Frequently asked questions
Do sole proprietors need this?
A sole proprietorship that is not a separate legal entity is generally not the kind of entity the franchise tax applies to. The provision matters most for LLCs, corporations, and other taxable entities. Confirm your situation with the Comptroller.
Can I apply after my LLC is already formed?
The Comptroller’s instructions cover businesses that are already formed with the Secretary of State; formation documents are not required again in that case. The business must still meet the formation-date windows and other requirements.
Does this exemption require a service-connected disability?
No. The Comptroller’s requirements focus on formation timing, 100% ownership by honorably discharged veterans, and the TVC verification letter. A disability rating is not listed as a requirement.
