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Texas Franchise Tax Guide

Complete guide to the Texas franchise tax: who must file, how to calculate your tax, no-tax-due thresholds, EZ computation rate, and filing deadlines for Texas businesses.

Texas doesn't have a state income tax. Great news, right? Well, mostly. Texas does have the franchise tax (officially the "margin tax"), which applies to most business entities doing business in the state. It's not an income tax—it's a tax on your privilege of doing business in Texas, based on revenue margins. The good news: if your total revenue is $2.65 million or less (reports due in 2026 and 2027), you owe no franchise tax. The less-good news: you still have to file. Here's everything you need to know.

Who Must File

Nearly every business entity in Texas must file a franchise tax report—even if they owe $0.

Entity TypeMust File?
LLCs (single and multi-member)Yes
Corporations (S-Corp and C-Corp)Yes
Partnerships and LLPsYes
Professional AssociationsYes
Sole ProprietorshipsNo
General Partnerships (all natural persons)No

Key point: Sole proprietors don't file franchise tax, but the moment you form an LLC (even single-member), you're on the hook for filing—even if you owe nothing.

Calculation Methods

The franchise tax is calculated on your "taxable margin," which is your total revenue minus the highest of several deductions:

MethodCalculation
Cost of Goods Sold (COGS)Total Revenue minus COGS
CompensationTotal Revenue minus Compensation
30% Standard DeductionTotal Revenue × 70%
$1 Million DeductionTotal Revenue minus $1,000,000

You pick whichever method gives you the lowest taxable margin (and therefore the lowest tax).

Most service businesses use the Compensation method. Businesses with high COGS (retailers, manufacturers) typically use the COGS method.

No-Tax-Due Threshold

If your total revenue is at or below $2.65 million (reports due in 2026 and 2027), you owe no franchise tax. But—and this is important—you still must file the report.

  • $2.65M or less: File a Public Information Report (PIR) or Ownership Information Report (OIR). Since the 2024 report year, a separate No Tax Due Report isn't required.
  • Over $2.65M but under $20M: Can use the EZ Computation (0.331% of revenue) or the standard calculation—whichever is lower
  • Over $20M revenue: Must use the standard calculation method

The threshold adjusts periodically. Always verify the current year's threshold with the TX Comptroller or your CPA.

EZ Computation

The EZ Computation is a simplified alternative for businesses with total revenue of $20 million or less:

DetailInfo
EligibilityTotal revenue ≤ $20 million
Rate0.331% of total revenue
Form05-169 (EZ Computation Report)

When to use it: Compare the EZ computation amount against the standard calculation. Sometimes the EZ rate on total revenue is lower than the standard rate on taxable margin. Sometimes it's higher. We run both calculations.

Example: A consulting firm with $5M revenue and $3M in compensation → Standard: ($5M - $3M) × 0.75% = $15,000. EZ: $5M × 0.331% = $16,550. Standard wins here.

Common Filing Mistakes

  • Not filing at all: Even if you owe $0, you must file. Failure to file can result in your entity's right to transact business being forfeited by the TX Secretary of State.
  • Using the wrong revenue figure: "Total revenue" for franchise tax purposes is NOT the same as gross receipts on your federal return. Certain items are excluded or adjusted.
  • Forgetting the PIR: The Public Information Report must be filed alongside your franchise tax report. It's a simple form with officer/director/member information.
  • Missing the $2.65M threshold by a dollar: If you're close to the threshold, review your revenue calculation carefully. Small adjustments in how you report revenue can mean the difference between $0 and thousands in tax.
  • Not filing a final report: If you dissolve or withdraw your entity from Texas, you must file a final franchise tax report within 60 days.

Penalties and Forfeiture

The TX Comptroller takes franchise tax seriously. Here's what happens if you don't comply:

SituationConsequence
Late Filing (no tax due)$50 penalty
Late Filing (tax due)5% of tax due (first 30 days) + 5% for each additional 30 days, up to 25%
Late PaymentSame as late filing penalties, plus interest
Continued Non-FilingEntity forfeiture—TX Secretary of State revokes your right to transact business
Forfeiture ConsequencesPersonal liability for owners/officers, inability to sue in TX courts, inability to maintain a lawsuit

Forfeiture is not theoretical—it happens. We've helped multiple clients reinstate forfeited entities, and the process is expensive and time-consuming. File on time.

Combined Groups

If you own multiple entities, you may need to file a combined group report:

  • When required: Entities with more than 50% common ownership that are engaged in a unitary business
  • How it works: All member entities file on a single combined report. Total revenue is combined (with intercompany eliminations).
  • Benefit: Losses in one entity can offset margin in another
  • Caution: Combined filing can also push you over the no-tax-due threshold when individual entities would be below it

Use our S-Corp Calculator to evaluate how your entity structure affects your overall tax burden.

Pro Tips

File Even If You Owe Nothing

The most common franchise tax mistake is not filing because you're under the threshold. Non-filing can lead to entity forfeiture, which creates real legal and business problems. It takes a few minutes to file the Public Information or Ownership Information Report.

Review Your Revenue Classification

How you classify revenue matters. Businesses near the $2.65M threshold should carefully review what counts as "total revenue" for franchise tax purposes—it's not always the same as your federal gross receipts.

Mark May 15 on Your Calendar

The franchise tax deadline is May 15, not April 15 like federal taxes. It's easy to forget because it falls a month after the federal deadline rush.

Frequently Asked Questions

My business made less than $2.65 million. Do I still need to file?
Yes, absolutely. Every LLC, corporation, partnership, and LLP registered in Texas must file a franchise tax report annually—even if you owe $0 in tax. If your total revenue is $2.65 million or less (reports due in 2026 and 2027), you owe no tax and file a Public Information Report or Ownership Information Report by May 15. It takes about 10 minutes. Failing to file—even when you owe nothing—can result in your entity being forfeited by the Texas Secretary of State, which creates serious legal consequences including personal liability for owners.
What happens if my entity gets forfeited for not filing?
Entity forfeiture is serious. Your business loses the right to transact business in Texas, you can't sue or defend lawsuits in Texas courts, and officers and directors can become personally liable for the entity's debts. To reinstate, you must file all delinquent franchise tax reports, pay all taxes, penalties, and interest owed, and submit a reinstatement application. The process can take weeks and cost hundreds to thousands of dollars depending on how many years you missed. It's far cheaper and easier to file on time.
How do I know which calculation method to use?
You want the method that produces the lowest taxable margin. If you have significant cost of goods sold (retail, manufacturing, wholesale), the COGS method is often best. If you have high payroll costs (service businesses, staffing), the Compensation method often wins. The 70% standard deduction is a fallback that benefits businesses with low COGS and low compensation. We calculate all four methods and select the one that results in the lowest tax. If you're under $20M in revenue, we also compare against the EZ computation rate.
When is the Texas franchise tax due?
The franchise tax report and payment are due May 15 annually (the Comptroller adjusts to the next business day if May 15 falls on a weekend). You can request an automatic 6-month extension to November 15 by filing Form 05-164 and paying at least 90% of the tax due by May 15. If you need additional time beyond November 15, you can request a second extension to the following May 15, but this requires demonstrated good cause and is not guaranteed. New entities must file their first report by May 15 of the year following their formation.
Is the franchise tax the same as a state income tax?
No. Texas specifically does not have a state income tax (it's prohibited by the state constitution, pending voter approval). The franchise tax is a margin-based tax on the privilege of doing business in Texas. The key difference: income tax is based on net profit, while franchise tax is based on total revenue minus a margin deduction. This means a business can owe franchise tax even in an unprofitable year, since the tax is based on revenue, not profit. However, for most small businesses at or under the $2.65M threshold, the practical effect is zero tax owed.

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