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Quick Answer
What is the Texas franchise tax? A privilege tax on most Texas business entities, calculated on taxable margin — not net income. Key facts:
- Entities with total revenue at or below $2.65 million (2026–2027 report years) owe no franchise tax, though most must still file a Public Information Report or Ownership Information Report
- Standard rate:0.75%of taxable margin; qualifying retailers/wholesalers:0.375%
- EZ Computation alternative:0.331%of total revenue for eligible smaller businesses
- Annual report due May 15— extensions available but interest accrues from May 15
- Sole proprietorships and all-natural-person general partnerships are generally exempt
- Single-member LLCs disregarded federally arestill taxable entities for franchise tax
Key Takeaways
- The Texas franchise tax applies to most entities organized in or doing business in Texas, including LLCs, corporations, LPs, and LLPs.
- Sole proprietorships and general partnerships composed entirely of natural persons are generally exempt; single-member LLCs are not.
- Entities below the no-tax-due threshold ($2.65M for the 2026–2027 report years) owe no tax, but most must still file a Public Information Report (PIR) or Ownership Information Report (OIR) by May 15 — the standalone "No Tax Due Report" was eliminated starting with the 2024 report year.
- Taxable margin is the least of four methods: revenue minus COGS; revenue minus compensation; 70% of revenue; or revenue minus $1 million.
- The EZ Computation method (0.331% of revenue) is a simplified alternative for entities below the EZ revenue threshold — but is not always the lower-tax option.
- Extensions to August 15 are available (November 15 for combined groups), but interest on unpaid tax accrues from May 15 regardless.
- Affiliated entities with 80%+ common ownership may be required to file as a combined group.
- Nonprofits must apply separately for a Texas franchise tax exemption — federal 501(c) status alone is not sufficient.
Texas has no personal income tax, but it does impose a franchise tax on most business entities. For small businesses, the franchise tax can be a source of confusion: it is based on revenue-derived margin (not profit), applies broadly to almost all entity types, and carries real consequences for late or missing filings — even when no tax is ultimately owed.
Table of Contents
1. What Is the Texas Franchise Tax?
The Texas franchise tax is a privilege tax — levied for the privilege of being organized under Texas law or doing business in Texas. Codified in Texas Tax Code Chapter 171 and administered by the Texas Comptroller of Public Accounts, it is calculated on an entity's taxable margin rather than net income, which is why it is commonly called the "margin tax."
Franchise Tax vs. Income Tax
| Feature | Texas Franchise Tax | Typical Corporate Income Tax |
|---|---|---|
| Tax base | Taxable margin (revenue-derived) | Net income (revenue minus expenses) |
| Requires profit? | No — an unprofitable entity may still owe tax | Generally yes |
| Rates | 0.331%–0.75% of margin/revenue | Typically 4%–9% of net income |
| Applies to | Most entity types | Typically only C-corporations |
| Filed | Annually by May 15 | Annually (often with quarterly estimates) |
Because the franchise tax is based on margin rather than profit, a business with zero profit may still have a filing obligation and potentially owe tax if revenue exceeds the no-tax-due threshold.
2. Who Must File and Pay Franchise Tax
Texas Tax Code § 171.0002 defines "taxable entity" broadly. The following are generally subject to franchise tax requirements:
- Corporations (C-corps and S-corps)
- Limited liability companies (LLCs), including single-member LLCs
- Limited partnerships (LPs) and limited liability partnerships (LLPs)
- Professional associations and professional corporations
- Business trusts
- Foreign entities doing business in Texas (even if not registered with the Secretary of State)
The obligation to file arises from doing business in Texas, not solely from being registered here.
Franchise tax filing is separate from, but often coincides with, other state compliance obligations — see our Annual Report Requirements for Texas Entities guide for how these obligations relate.
3. Exempt Entities
| Entity Type | Status | Key Notes |
|---|---|---|
| Sole proprietorship | Exempt — not a taxable entity | Owner reports income on personal return |
| General partnership of natural persons only | Exempt | If any partner is an entity (LLC, corporation, etc.), the partnership may become taxable |
| Passive entities (certain) | May qualify under § 171.0003 | Primarily passive investment income; specific statutory criteria apply |
| Qualified REITs | May qualify for reduced rate or exemption | Subject to specific statutory conditions |
| Approved nonprofits | Exempt after Comptroller approval | Separate application required; federal 501(c) status alone is insufficient |
Sole proprietorships and all-natural-person general partnerships are exempt; virtually all other common business entity types are taxable entities for franchise tax purposes.
4. The No-Tax-Due Threshold
Even if an entity is a taxable entity, it owes no franchise tax if total revenue falls below the no-tax-due threshold, adjusted periodically for inflation by the Comptroller.
Falling below the no-tax-due threshold eliminates tax liability but does not eliminate the obligation to file a Public Information Report or Ownership Information Report by May 15.
5. What Counts as Total Revenue
Total revenue under Texas Tax Code § 171.1011 is derived from applicable federal return line items — filed under the entity's EIN — and includes gross receipts or sales, interest, dividends, rents, royalties, gains from asset sales, and other reportable income. Common exclusions and adjustments include revenue attributable to out-of-Texas business (subject to single-factor gross receipts apportionment), flow-through funds such as collected sales taxes, intercompany eliminations within a combined group, and bad debts.
Total revenue begins with federal gross receipts, adjusted for Texas-specific exclusions and apportionment; multi-state entities apportion revenue to determine the Texas-attributable portion.
6. The Four Taxable Margin Methods
Once total revenue is established, the entity calculates taxable margin using whichever of the following four methods produces the lowest positive result:
Better Practice
Running all four calculations before filing — rather than defaulting to last year's method — is commonly recommended. The optimal method can shift year to year as revenue and cost structures change.
The four methods allow entities to select the most favorable approach annually; method comparison is a standard step in franchise tax preparation.
7. The EZ Computation Method
Entities with total revenue below the EZ Computation threshold (currently approximately $20 million — verify current year) may use a simplified alternative that bypasses the full margin analysis.
EZ Computation simplifies the calculation but is not always the lower-tax option — comparing it against standard margin methods is commonly recommended each year.
8. Tax Rates
| Entity / Calculation Type | Rate | Notes |
|---|---|---|
| Standard — most taxable entities | 0.75% of taxable margin | Applies to service businesses, professional firms, and mixed-activity businesses |
| Qualifying retailers and wholesalers | 0.375% of taxable margin | Must meet § 171.002(b); generally requires that a majority of revenue comes from qualifying tangible goods sales |
| EZ Computation (eligible entities) | 0.331% of total revenue | Available below the EZ revenue threshold; uses a simplified calculation method—compare with the standard methods |
| Entities below the no-tax-due threshold | $0 | No tax owed; a No Tax Due report is typically still required |
The applicable rate depends on both the business activity and the calculation method selected. The reduced retailer/wholesaler rate is available only to entities that satisfy the specific requirements of § 171.002(b).
9. Combined Groups
Affiliated entities with common ownership may be required to file franchise tax as a combined group when: (1) two or more entities share at least 80% common ownership; (2) each entity is independently a taxable entity; and (3) at least one member does business in Texas. A designated reporting entity files a single report aggregating all members' revenues, eliminating intercompany transactions. Combined groups are eligible for a November 15 extension (versus August 15 for individual entities).
Risk
Businesses with multiple affiliated LLCs or holding structures may inadvertently be required to file as a combined group without recognizing it. Filing separate reports when combined group treatment is required may result in incorrect tax calculations and Comptroller scrutiny.
Multi-entity businesses under 80%+ common ownership should evaluate combined group requirements before filing separate franchise tax reports.
10. Filing Deadlines and Extensions
The annual franchise tax report and any tax due are generally due on May 15. The length of any available extension depends on the taxpayer's payment method and the extension option selected—it is not determined solely by whether the entity is part of a combined group.
| Payer Type / Option | Standard Due Date | Extended Due Date |
|---|---|---|
| Non-EFT payer paying 100% of the prior year's tax by May 15 | May 15 | November 15 |
| Non-EFT payer paying 90% of the current year's estimated tax by May 15 | May 15 | November 15 (report must be filed by Nov. 15) |
| EFT-mandated payer (paid $10,000+ in franchise tax the prior year) | May 15 | August 15 (first extension); November 15 with a valid second extension payment made by Aug. 15 |
| Entity below the no-tax-due threshold filing only a PIR/OIR | May 15 | November 15 (no-payment extension request) |
May 15 is both the filing deadline and the payment interest accrual start date — the length of an available extension depends on payment method and which payment option is used, not simply on whether the entity is part of a combined group.
11. Penalties and Forfeiture
| Situation | Consequence |
|---|---|
| Failure to pay by May 15 | 5% penalty on the unpaid amount |
| Tax remains unpaid 30 or more days after the due date | Additional 5% penalty (total of 10%) |
| Interest on unpaid tax | Accrues from May 15 at the Comptroller's current interest rate |
| Failure to file a No Tax Due report | Potential tax assessment and loss of good standing |
| Sustained non-compliance | Forfeiture of the entity's right to do business; officers may face personal liability |
Risk
An entity placed in franchise tax forfeiture loses certain legal rights — including the ability to maintain lawsuits in Texas courts — and officers or directors may face personal liability for debts incurred during the forfeiture period. Reinstatement requires filing all delinquent reports and paying all outstanding taxes, penalties, and interest.
Penalties and forfeiture consequences make timely filing important even when no tax is owed — the No Tax Due report is not optional.
12. Nonprofit Franchise Tax Exemption
Organizations exempt from federal income tax under IRC § 501(c) may qualify for Texas franchise tax exemption, but this is not automatic. A separate application to the Texas Comptroller is required using Form AP-204 for most nonprofits, with supporting documentation including the IRS determination letter and organizational documents. Until the Comptroller's exemption certificate is issued, the organization remains subject to franchise tax filing requirements.
Federal 501(c) status alone does not exempt a Texas organization from franchise tax — a separate Comptroller application is required before the exemption takes effect.
13. Common Mistakes
Common Mistake Not Filing Because "We Don't Owe Any Tax"
Entities below the no-tax-due threshold no longer file the old No Tax Due Report, but most still must file a Public Information Report or Ownership Information Report by May 15. Failing to file may result in loss of good standing and eventual forfeiture.
Common Mistake Treating a Disregarded Single-Member LLC as Not Required to File
A single-member LLC disregarded for federal income tax is still a taxable entity for Texas franchise tax. Many LLC owners discover this only after receiving a Comptroller notice with penalties already accrued.
Common Mistake Using Last Year's No-Tax-Due Threshold Without Checking the Current Amount
The threshold is adjusted periodically. Always verify the applicable amount for the current report year with the Comptroller before concluding no tax is due.
Common Mistake Defaulting to One Calculation Method Without Comparing All Four
The optimal margin method can shift year to year as revenue and cost structures change. Routinely using the same method without comparison may result in overpaying franchise tax.
Common Mistake Assuming an Extension Also Extends the Payment Deadline
Extensions allow more time to file the report but not more time to pay without interest. Interest accrues from May 15 on any unpaid tax — businesses filing on extension without an estimated payment by May 15 may face avoidable interest charges.
Common Mistake Failing to Evaluate Combined Group Requirements for Multi-Entity Businesses
Businesses with multiple affiliated entities (80%+ common ownership) may be required to file as a combined group. Filing separate returns when combined group treatment is required may produce incorrect tax calculations and compliance issues.
Common Mistake Assuming Federal Nonprofit Status Automatically Confers Texas Franchise Tax Exemption
Nonprofits that receive IRS 501(c) status sometimes omit the separate Comptroller exemption application, remaining subject to franchise tax requirements — sometimes for years — without realizing it.
Common Mistake Not Budgeting for Franchise Tax in Business Projections
Because franchise tax is based on margin rather than profit, a startup or low-margin business may owe tax in years with no net income. Omitting this from financial models can create cash flow surprises at filing time.
14. Franchise Tax Compliance Checklist
☐ Confirmed whether the entity is a "taxable entity" under § 171.0002 or falls under a recognized exemption
☐ Verified whether a Comptroller franchise tax exemption certificate has been obtained (for nonprofits and other potentially exempt entities)
☐ Calculated total revenue for the accounting period using applicable federal return line items and Texas apportionment rules
☐ Compared total revenue against the current year's no-tax-due threshold ($2.65M for 2026–2027; confirmed at comptroller.texas.gov)
☐ If below threshold: calendared May 15 Public Information Report (PIR) or Ownership Information Report (OIR) filing deadline
☐ If above threshold: ran all four margin methods (COGS, compensation, 70%, $1M) and selected the lowest positive result
☐ Compared the selected margin method result against the EZ Computation method (if eligible)
☐ Applied the correct tax rate (0.75% standard; 0.375% qualifying retailers/wholesalers; 0.331% EZ)
☐ Evaluated whether the entity is part of an affiliated group requiring combined group reporting (80%+ common ownership)
☐ Confirmed the accounting period for the report year (especially for new entities or fiscal-year filers)
☐ Filed or scheduled the report by May 15 — or filed an extension request by May 15
☐ Made any estimated payment by May 15 if filing on extension, to minimize interest exposure
☐ Confirmed entity is in good standing with the Comptroller (no outstanding delinquent franchise tax reports)
☐ Calendared next year's May 15 deadline and noted any threshold or rate changes from the Comptroller
Primary Government Sources
🔗 Texas Comptroller — Franchise Tax Overview
🔗 Texas Comptroller — Franchise Tax Filing Requirements
🔗 Texas Comptroller — Franchise Tax Forms
16. Frequently Asked Questions
What is the Texas franchise tax?
The Texas franchise tax is a privilege tax imposed on most business entities for the right to do business in Texas. It is calculated on taxable margin — not net income — which is why it is commonly called the "margin tax." Governed by Texas Tax Code Chapter 171, it is administered by the Texas Comptroller of Public Accounts. A business does not need to be profitable to owe franchise tax if its revenue exceeds the no-tax-due threshold.
Who must pay Texas franchise tax?
Most entities organized in Texas or doing business in Texas must file, including corporations, LLCs (including single-member LLCs), limited partnerships, LLPs, professional associations, and business trusts. Sole proprietorships and general partnerships composed entirely of natural persons are generally exempt. Single-member LLCs disregarded for federal income tax are still taxable entities for Texas franchise tax purposes.
What is the no-tax-due threshold?
Entities whose annualized total revenue falls at or below the no-tax-due threshold owe no franchise tax. For the 2026 and 2027 report years, the threshold is $2,650,000, up from $2,470,000 for 2024–2025. Entities below the threshold no longer file the old No Tax Due Report but generally still must file a Public Information Report or Ownership Information Report by May 15. The Comptroller adjusts the threshold every two years — always verify the current figure at comptroller.texas.gov before filing.
How is the Texas franchise tax calculated?
Taxable margin is the least of four methods: (1) revenue minus COGS; (2) revenue minus compensation (subject to a per-employee cap); (3) 70% of revenue; or (4) revenue minus $1 million. The applicable tax rate — 0.75% for most entities or 0.375% for qualifying retailers/wholesalers — is applied to that margin. An EZ Computation method (0.331% of total revenue) is also available for eligible smaller businesses.
When is the Texas franchise tax report due?
The annual franchise tax report is generally due May 15. Extensions to August 15 are available for most entities (November 15 for combined groups) if an extension request is filed by May 15. Interest on unpaid tax accrues from May 15 regardless of extension status — making estimated payments by May 15 a common practice when a liability is expected.
Are LLCs subject to Texas franchise tax?
Yes. All LLCs doing business in Texas or formed in Texas are generally subject to franchise tax requirements, including single-member LLCs. The federal disregarded entity status does not affect Texas franchise tax treatment. LLCs below the no-tax-due threshold owe no tax but must still file a Public Information Report by May 15.
What is the EZ Computation method?
The EZ Computation is a simplified calculation method for entities with total revenue below approximately $20 million (verify current threshold). The tax equals 0.331% of total revenue after the applicable deduction. It is simpler than the standard margin calculation but is not always the lower-tax option — comparing it against standard margin method results before filing may help identify the most advantageous approach for the year.
Are nonprofits exempt from Texas franchise tax?
Many nonprofits may qualify for franchise tax exemption, but federal 501(c) status alone does not automatically exempt a Texas organization from franchise tax. A separate application to the Texas Comptroller (generally Form AP-204) is required, and the exemption takes effect only after the Comptroller issues an exemption certificate. Until that certificate is issued, the organization remains subject to franchise tax filing requirements.
What happens if I miss the franchise tax filing deadline?
Late payment triggers a 5% penalty, with an additional 5% if unpaid after 30 days, plus accruing interest from May 15. Entities that fail to file or pay may eventually be placed in forfeiture, losing certain legal rights — including the ability to maintain lawsuits in Texas courts — and potentially exposing officers to personal liability for debts incurred during the forfeiture period.
What is a combined group for Texas franchise tax purposes?
A combined group consists of affiliated entities with at least 80% common ownership that must file a single combined franchise tax report. One designated reporting entity files on behalf of the group, aggregating all members' revenues and eliminating intercompany transactions. Multi-entity businesses under common ownership should evaluate whether combined group reporting is required before filing separate reports.
Is the Texas franchise tax the same as sales tax?
No. Franchise tax and sales tax are separate obligations administered by the same agency, the Texas Comptroller. Sales tax is collected from customers on taxable sales and remitted periodically, while franchise tax is an annual privilege tax owed by the entity itself, based on taxable margin rather than transaction volume. A business can owe one, both, or neither depending on its activities and revenue.
Does an S corporation pay Texas franchise tax?
Yes. Texas franchise tax applies at the entity level and does not follow federal pass-through treatment. An S corporation is a taxable entity for Texas franchise tax purposes regardless of how it is taxed federally, and it must file and potentially pay franchise tax the same as a C corporation, subject to the same no-tax-due threshold and calculation methods.
What happens if my business never made a profit?
Franchise tax is based on taxable margin derived from revenue, not net profit, so an unprofitable business can still owe franchise tax if its total revenue exceeds the no-tax-due threshold. Businesses with high revenue but thin or negative margins sometimes discover this only when a tax bill arrives, which is why budgeting for franchise tax separately from income tax projections is commonly recommended.
Do foreign (out-of-state) LLCs owe Texas franchise tax?
Generally yes, if the entity is doing business in Texas — for example, by having Texas employees, maintaining a Texas office, or regularly soliciting Texas customers — even without registering with the Texas Secretary of State. Economic nexus rules can trigger a filing obligation based on the level of Texas-sourced activity, so verify nexus status before assuming an out-of-state entity is exempt.