If you own or operate a business in Texas, understanding the Texas franchise tax is a critical part of staying compliant with state tax laws. The Texas franchise tax is the state’s primary business tax and applies to many entities that conduct business in or have a presence in Texas. Businesses that fail to meet Texas franchise tax filing requirements may face penalties, loss of good standing, or administrative complications with the Texas Comptroller of Public Accounts.
Managing Texas franchise tax compliance starts with knowing who is required to file, how the tax is calculated, and when reports and payments are due. With accurate reporting and proactive planning, business owners can avoid costly mistakes, meet all Texas franchise tax deadlines, and keep their businesses in good standing year after year.
Key Takeaways
- Most Texas businesses must deal with franchise tax
Franchise tax is Texas’s main business tax and applies to the majority of formal entities operating in or connected to the state—regardless of whether they are profitable. - It’s calculated from revenue, not net income
Unlike federal income taxes, Texas franchise tax is based on a taxable margin derived from total revenue, with specific deductions allowed. - The $2.47 million exemption benefits small businesses
Companies earning $2.47 million or less in annual revenue do not owe franchise tax, but they must still file required reports to remain compliant. - LLCs, corporations, and partnerships are generally included
Most LLCs (including single-member and series LLCs), corporations, partnerships, S corporations, and qualifying out-of-state entities must file. - May 15 is the firm annual deadline
Reports and payments are due by May 15 each year. Filing late triggers a $50 penalty, even if no tax is owed, and extensions do not delay payment. - Calculation method selection matters
Texas allows multiple ways to compute taxable margin. Choosing the wrong option—or reporting revenue incorrectly—can result in higher taxes or compliance issues.
Texas Franchise Tax Basics
So what exactly is Texas franchise tax? Simply put, it’s the state’s primary tax on businesses. While it has existed for more than a century, the modern version looks very different from its early days.
In 2008, Texas overhauled the system, expanding coverage to additional entity types such as partnerships and shifting the calculation to a margin-based model. This change significantly increased revenue collections and reshaped compliance requirements.
A major update arrived in 2023, when Texas permanently raised the no-tax-due threshold to $2.47 million in annual revenue for reports due in 2024 and later. Businesses under this limit are exempt from paying the tax, though reporting obligations still apply.
What Is the Texas Franchise Tax?
Despite the name, this tax has nothing to do with owning a franchise like a restaurant chain. Instead, it’s a state-level privilege tax—a fee paid for the right to conduct business in Texas.
Importantly, a business can owe franchise tax even if it didn’t generate a profit, since liability is tied to revenue and margin rather than net income.
Who Administers the Tax?
The Texas Comptroller of Public Accounts oversees franchise tax administration. This agency sets the rules, issues guidance, provides filing forms, and operates the online Webfile system used for annual reporting and payments.
Who Is Required to File?
If your business is legally formed in Texas or has a meaningful economic presence in the state, franchise tax requirements likely apply.
Business Entities That Must File
Most formal entities fall under the franchise tax umbrella, including:
- Corporations (C corps and S corps)
- Limited liability companies (single-member and series LLCs included)
- General and limited partnerships
- Professional associations
- Certain trusts, banks, and business associations
Out-of-state businesses may also be required to file if they establish economic nexus—such as having employees, inventory, or sufficient revenue activity in Texas.
Who Is Exempt?
Some organizations are excluded from franchise tax requirements. Common exemptions include:
- Sole proprietorships
- Unincorporated political committees
- Real estate mortgage investment conduits
- Qualifying nonprofit organizations, including certain charities and educational entities
Even when exempt from the tax itself, some organizations still face reporting obligations to maintain their status.
How Texas Franchise Tax Is Calculated
Texas uses a margin-based system tied to total revenue rather than profit. Businesses determine their taxable margin using the method that produces the lowest result, then apply the appropriate tax rate.
What Is the Tax Based On?
The calculation begins with total revenue as reported on the federal return, minus allowed exclusions. From there, businesses may compute margin using one of several methods:
- Cost of goods sold deduction
- Compensation deduction
- 70% of total revenue
- Flat deduction (where eligible)
Tax Rates and Revenue Thresholds
After the margin is determined, tax rates are applied based on business type:
- Retailers and wholesalers: 0.375%
- Most other businesses: 0.75%
If total revenue does not exceed $2.47 million, no tax is owed—though filing requirements still apply.
Filing Deadlines and Payment Rules
Staying compliant requires tracking both filing and payment deadlines.
- Annual due date: May 15 (or the next business day if it falls on a weekend or holiday)
- Late filing penalty: $50, even if no tax is due
- Preferred filing method: Texas Comptroller Webfile system
Extensions may grant additional time to file, but they do not extend the payment deadline. Any estimated tax owed must still be paid by May 15 to avoid penalties and interest.
Common Filing Forms
The form you use depends on your revenue and calculation method:
- EZ Computation Form: Available for businesses with revenue up to $20 million, using a simplified rate
- Long Form (Form 05-102): Required for businesses using standard margin calculations
Mistakes to Avoid
- Incorrect revenue reporting
Using federal revenue figures without applying Texas-specific exclusions can inflate tax liability. - Not comparing calculation methods
Failing to test all allowed margin options may result in unnecessary overpayment. - Missing deadlines
Even no-tax-due reports are subject to late penalties. - Skipping required information reports
Businesses under the revenue threshold may not owe tax but still must file annual information reports to remain in good standing.
Final Thoughts
Understanding Texas franchise tax doesn’t have to be overwhelming. With accurate revenue reporting, careful calculation method selection, and timely filing, businesses can stay compliant and avoid penalties.
Let A-Tex Tax handle your Texas Franchise Taxes so you can rest easy and focus on what matters most.