Texas Franchise Tax: What Every DFW Business Owner Should Know

"Texas doesn't have income tax!"

True. But that doesn't mean your business files nothing at the state level. The Texas Franchise Tax catches many DFW business owners by surprise.

The short answer: Almost every business in Texas must file a franchise tax report annually. Whether you owe anything depends on your revenue, but the filing requirement applies to most businesses regardless.

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What Is the Texas Franchise Tax?

The Texas Franchise Tax (also called the margin tax) is a tax on businesses operating in Texas. It's not an income tax—it's based on your "margin," which is calculated differently.

Who Must File?

Almost every business entity:

• LLCs (including single-member LLCs)
• Corporations (C-corps and S-corps)
• Partnerships
• Limited partnerships
• Professional associations
• Business trusts
• Joint ventures

Who's Exempt?

• Sole proprietorships (no formal business entity)
• General partnerships owned entirely by natural persons
• Certain passive investment entities
• Non-profits meeting specific requirements

Important: Even if you're exempt from paying, you may still need to file a report.

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The No-Tax-Due Threshold

Here's the good news for most small businesses:

2026 No-Tax-Due Threshold

If your total revenue is $2.47 million or less, you owe no franchise tax.

You still file a report (the "No Tax Due" report), but you don't pay anything.

This threshold covers the vast majority of DFW small businesses. But you must still file to maintain good standing with the state.

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How the Tax Is Calculated

If your revenue exceeds the no-tax-due threshold, here's how the tax works:

Step 1: Determine Total Revenue

Total revenue includes:

• Gross receipts
• Sales
• Most income items

Step 2: Calculate Taxable Margin

You choose the calculation method that gives you the lowest margin:

Method	Calculation
Total Revenue minus Cost of Goods Sold	Revenue - COGS
Total Revenue minus Compensation	Revenue - Wages/Benefits
Total Revenue × 70%	Revenue × 0.70

For most service businesses without significant COGS, the compensation method or 70% method usually works best.

Step 3: Apply the Tax Rate

Business Type	Tax Rate
Retail and wholesale	0.375%
All other businesses	0.75%

Example Calculation

A Plano consulting firm with $3 million in revenue and $1.2 million in compensation:

Method 1: Revenue × 70% = $3,000,000 × 70% = $2,100,000 Method 2: Revenue - Compensation = $3,000,000 - $1,200,000 = $1,800,000

Best method: Compensation (lower margin)

Tax: $1,800,000 × 0.75% = $13,500

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The E-Z Computation Method

For businesses with revenue between $2.47 million and $20 million, there's a simpler option.

E-Z Computation

• Tax = Total Revenue × 0.331%
• No margin calculation required
• May be higher or lower than the regular method

Example: $3 million revenue × 0.331% = $9,930

In our earlier example, the E-Z computation ($9,930) is actually less than the regular calculation ($13,500). Always run both calculations.

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Key Deadlines

Annual Report Due Date

May 15 of each year for the prior year's activity.

If May 15 falls on a weekend or holiday, the due date extends to the next business day.

Extensions

You can request an extension to November 15, but:

• You must still pay any estimated tax due by May 15
• File Form 05-164 to request the extension
• Interest applies to any underpayment

Initial Report

New businesses file their initial report based on their accounting period end date. The first report may cover a short period.

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Filing Requirements by Revenue

Total Revenue	Filing Requirement
$0 - $2.47M	File No Tax Due report (Form 05-163)
$2.47M - $20M	File EZ Computation (Form 05-169) OR regular report (Form 05-158-A/B)
Over $20M	File regular report (Form 05-158-A/B)

Even if you owe zero, you must file to stay in good standing.

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Common Mistakes to Avoid

Mistake 1: Not Filing Because You Owe Nothing

This is the biggest mistake I see. Business owners under the threshold assume they don't need to file.

Reality: Not filing puts your entity in bad standing with the state. Eventually, the Texas Comptroller will forfeit your business charter.

Fix: File the No Tax Due report every year by May 15.

Mistake 2: Using the Wrong Revenue Figure

Total revenue for franchise tax purposes isn't always the same as your accounting revenue. Certain items are excluded or added back.

Fix: Review the franchise tax instructions carefully, or have your CPA prepare the report.

Mistake 3: Missing the Deadline

Late filing incurs a 5% penalty on tax due (minimum $50), plus additional 5% if more than 30 days late.

Fix: Put May 15 on your calendar. Consider requesting an automatic extension if you're unsure you'll be ready.

Mistake 4: Forgetting About Combined Reporting

If you own multiple entities that are part of an "affiliated group," you may need to file a combined report.

Fix: Review related-party rules with your CPA.

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Maintaining Good Standing

Filing your franchise tax report isn't just about paying taxes—it's about keeping your business in good standing with Texas.

What Happens If You Don't File?

1. Warning notices from the Comptroller
2. Penalties and interest accrue
3. Corporate privileges forfeited — you can't sue, be sued, or conduct business
4. Entity involuntarily terminated — the state dissolves your business

How to Get Back in Good Standing

If you've fallen behind:

1. File all missing reports
2. Pay all taxes, penalties, and interest
3. File reinstatement paperwork if your entity was forfeited
4. Pay reinstatement fees

It's easier (and cheaper) to stay current than to catch up.

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Franchise Tax for LLCs

Many LLC owners are confused about their filing requirements.

Single-Member LLCs

• Must file a franchise tax report (not a sole proprietor for state purposes)
• Usually file No Tax Due if under the threshold
• Use Form 05-163

Multi-Member LLCs

• File as a partnership for franchise tax purposes
• Same forms and thresholds apply
• Each member's share of revenue counts toward the threshold

LLCs Taxed as S-Corps

• File based on LLC status, not S-corp election
• S-corp election is federal—doesn't change Texas classification

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Registered Agent Requirements

While we're talking Texas compliance, don't forget your registered agent.

Every Texas business entity must maintain a registered agent—someone authorized to receive legal documents on behalf of your business.

Requirements

• Must be a Texas resident OR a business authorized to operate in Texas
• Must have a physical street address in Texas (not a PO box)
• Must be available during business hours

Keeping It Current

Update your registered agent information promptly if it changes. An outdated registered agent can mean missed legal notices—including lawsuits.

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Texas vs. Other States

If you're moving to Texas from another state (welcome to DFW!), here's how we compare:

State	Business Tax Type	Rate
Texas	Franchise (margin) tax	0.75% of margin
California	Corporate income tax	8.84% of income
New York	Corporate franchise tax	6.5% of income
Florida	Corporate income tax	5.5% of income

Texas's franchise tax is generally lower than other states' income taxes, but it applies to a broader base (revenue-based rather than profit-based).

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The Bottom Line

The Texas Franchise Tax isn't complicated for most small businesses—especially those under the $2.47 million threshold who owe nothing.

But "owing nothing" doesn't mean "filing nothing." Every LLC, corporation, and partnership in Texas needs to file an annual report to maintain good standing.

If you're a DFW business owner and aren't sure about your franchise tax obligations, let's make sure you're compliant before May 15.

Not sure about your franchise tax obligations? Let's get you compliant →

— Krystal Le, CPA

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LeCPA helps Texas businesses across Plano, Richardson, Frisco, and Dallas with state compliance and tax planning. Schedule a free strategy session →