Understanding the Texas Franchise Tax: A Guide for Businesses

The Texas franchise tax is a state tax levied on businesses for the privilege of doing business in Texas. Despite its name, it is not limited to franchises. Most LLCs, corporations, and other entities formed or operating in Texas are subject to this tax. Here’s an analytical look at what the franchise tax is and how it works:

1. Who Is Subject to the Franchise Tax: The franchise tax applies to taxable entities – which generally includes corporations, LLCs, limited partnerships, professional associations, business trusts, and certain other business entities. Notably, sole proprietorships and most general partnerships (unless all partners are entities) are not subject to franchise tax. Nonprofits that have obtained 501(c)(3) status are also exempt. If your business is organized in Texas or does business in Texas and is not exempt, you’re likely subject to this tax.

2. The “No Tax Due” Threshold: Texas provides a generous revenue threshold under which businesses owe no franchise tax. For reports due in 2024 and 2025, that threshold is $2.47 million in annual revenue. If your company’s total revenues (after certain allowed deductions) are equal to or less than that amount, you owe no tax. In fact, beginning in 2024, Texas no longer even requires a No Tax Due Report from entities below the threshold (though an information report is still required – more on that below). This means many small and medium-sized businesses in Texas have zero franchise tax burden due to this threshold.

3. Tax Rates and Calculating the Tax: If your revenues exceed the threshold, you will owe franchise tax. Texas calculates the tax on a taxable margin. The margin is broadly defined as the lesser of 1) Total Revenue minus Cost of Goods Sold, 2) Total Revenue minus certain Compensation payments, 3) Total Revenue times 70%, or 4) Total Revenue minus $1 million (this last option was eliminated for most after 2019). You choose the method that results in the lowest tax. The tax rates are:

• 0.75% on the taxable margin for most entities.
• 0.375% on the taxable margin for entities primarily engaged in retail or wholesale trade. There’s also an E-Z Computation method for entities with $20 million or less in revenue, which applies a 0.331% rate to total revenue (with no deductions) – but using that means you can’t deduct margin components.

For example, if your Texas LLC had $5 million in total revenue and $4 million in cost of goods sold, your margin (by the COGS method) is $1 million. At the 0.75% rate, the tax would be $7,500.

4. Filing and Due Date: The franchise tax is reported annually. The standard due date is May 15 each year (for the prior calendar year’s activity). If May 15 falls on a weekend or holiday, the due date shifts to the next business day. Initial reports are generally due the year following the year your entity became subject to the tax (e.g., if you formed an LLC in 2025, your first report would be due by May 15, 2026). Annual franchise tax reports include either:

• A No Tax Due Report (if under the threshold, though as noted, after 2024 these are no longer required for many businesses),
• An EZ Computation Report (if using the simplified method), or
• A Long Form Report (if calculating margin with deductions).

Additionally, all entities must file a Public Information Report (PIR) (for corporations and LLCs) or an Ownership Information Report (for partnerships) each year. The PIR lists the officers or directors of a corporation or the managing members of an LLC and is a public disclosure of company leadership.

5. Paying the Tax: If you owe tax, it must be paid by the due date to avoid penalties. Texas allows electronic filing and payment via the Comptroller’s Webfile system. There are automatic extensions available (up to November) if you pay a portion of the tax due by May 15 and file an extension request, but any balance will accrue interest.

6. Consequences of Non-Compliance: Missing franchise tax filings or payments can have serious consequences. The Texas Comptroller can impose penalties and interest on late payments. Moreover, the Texas Secretary of State can forfeit your business’s charter or ability to conduct business in Texas if franchise tax reports go delinquent for too long. “Forfeited” entities lose their legal privileges (like the ability to sue in court or enforce contracts) and owners/officers can even become personally liable for certain debts incurred during forfeiture. The good news is these outcomes are avoidable by staying current or by quickly correcting any oversight through the Comptroller’s reinstatement process.

7. Recent Changes: The franchise tax has seen changes in recent years, mostly to the benefit of businesses. The increase of the no-tax-due threshold to $2.47 million (adjusted periodically for inflation) has exempted many companies from paying. And as of 2024, if you’re under the threshold, you no longer have to file an annual No Tax Due report – though you should still file the PIR to maintain good standing. It’s wise to keep an eye on legislative updates, as Texas lawmakers often discuss modifications to the franchise tax (including proposals to further reduce or even eliminate it).

In summary, the Texas franchise tax is something every business owner should understand, even if you currently owe nothing. Calculate your margin, file the necessary report, and you’ll stay in good standing with the state. If your business grows beyond the exemption threshold, be prepared for your tax obligations to increase accordingly.

Need help navigating Texas franchise tax filings or ensuring you’ve met all requirements? Our experts are here to assist. Get started with TexasRelocate for guidance on Texas tax compliance, so you can focus on running your business.