If you own a business in Texas, understanding the Texas Franchise Tax is essential to staying compliant and avoiding costly penalties. Unlike income tax, Texas imposes a franchise tax, a type of privilege tax, on most businesses operating within the state. Many business owners find this tax confusing, especially since its calculation and filing requirements differ from other state taxes.
What Is the Texas Franchise Tax?
The Texas Franchise Tax is a privilege tax imposed on businesses for the right to do business in Texas. Instead of taxing income, Texas calculates this tax based on a business’s taxable margin. The tax is collected by the Texas Comptroller of Public Accounts and applies annually.
Unlike states that levy income taxes on businesses, Texas uses the franchise tax to generate revenue without taxing individual or corporate income directly. The tax funds public services and infrastructure that support businesses operating in the state.
How It Differs from Other Business Taxes
- Not an income tax: It’s calculated on taxable margin, not net income or profits.
- Applies broadly: Most businesses registered or doing business in Texas are subject to it.
- Flat reporting structure: The tax rates and filing processes differ significantly from income taxes and sales taxes, requiring specific forms and calculations.
Who Is Required to File the Texas Franchise Tax?
Determining whether your business must file the Texas Franchise Tax is an important step toward compliance. Not every business operating in Texas owes this tax, but most legal business entities are subject to it in some way. Failing to file when required can lead to penalties, interest charges, and even loss of your business’s good standing with the state.
- Business Types Subject to the Tax
The Texas Franchise Tax applies to a broad range of business structures, including:
- Limited Liability Companies (LLCs): Both single-member and multi-member LLCs doing business in Texas must file and potentially pay the franchise tax.
- Corporations: This includes traditional C-Corporations as well as S-Corporations registered or conducting business in Texas.
- Partnerships and Limited Partnerships: Partnerships that have a legal presence in Texas, including limited partnerships, are generally required to file.
- Professional Associations and Other Legal Entities: Entities such as law firms, medical practices, and other professional organizations that operate as recognized legal entities also must file.
Exceptions:
- Sole Proprietorships and General Partnerships without formal legal entity status typically do not owe the franchise tax. However, if they have registered a legal entity or elected to be taxed as one, they may be subject.
- Thresholds and Exemptions
Even if your business is subject to the franchise tax, you may not owe any tax if you fall below certain revenue thresholds. However, filing is still often required.
- No Tax Due Threshold: For 2024, businesses with annual gross revenue less than $1,230,000 are required to file a No Tax Due Report, but do not owe any franchise tax. This lets the state know you’re active but exempt from paying due to low revenue.
- Exempt Entities: Some businesses are exempt from paying franchise tax altogether, including:
- Certain nonprofit organizations (501(c)(3) charities, educational institutions)
- Passive entities that earn investment income but do not actively conduct business
- Specific small businesses that meet the exemption criteria
- Inactive Businesses: If your business was formed or registered but did not conduct any business activities in Texas during the year, you may be exempt from paying the tax. However, you may still be required to file an annual report to maintain your status with the state and avoid administrative dissolution.
How Is the Texas Franchise Tax Calculated?
Calculating the franchise tax correctly is essential for compliance and minimizing liability.
Taxable Margin and Rates
The taxable margin is the basis for the franchise tax calculation. It is computed as the lesser of:
- Total revenue minus the cost of goods sold (COGS),
- Total revenue minus compensation,
- Total revenue times 70%, or
- Total revenue minus $1 million (the deduction amount can change annually).
Current Tax Rates
- 0.75% for most entities
- 0.375% for entities primarily engaged in retail or wholesale trade
Common Calculation Methods
Businesses choose the most favorable calculation method to minimize taxes. Understanding your business’s structure and expense patterns helps decide the best approach.
What are the filing requirements and deadlines?
Timely filing is critical to avoid penalties.
Here are some key dates to remember:
- Annual Report and Franchise Tax Return: Due May 15 every year.
- If May 15 falls on a weekend or holiday, the deadline shifts to the next business day.
Required Forms and Filing Process
- Franchise Tax Report: Filed online via the Texas Comptroller’s Webfile system.
- No Tax Due Report: Filed if your revenue falls below the threshold.
- Additional schedules may be required depending on your calculation method and deductions.
What are the penalties for late or non-filing?
Failing to file or pay the Texas Franchise Tax on time can result in:
- Late filing penalties: 5% of the tax due plus 5% interest per month.
- Late payment penalties: 5% penalty on unpaid tax, plus interest.
- Loss of good standing: Affecting your ability to do business, renew licenses, or enter into contracts.
- Legal consequences: Potential for state enforcement actions, including liens.
How Can You Stay Compliant with the Texas Franchise Tax?
Here are actionable steps to keep your business compliant with the Texas Franchise Tax:
- Maintain organized records: Track revenue, COGS, and compensation accurately.
- Use accounting software: Many platforms offer Texas tax calculation features to simplify filing.
- Plan: Prepare your financials well before the May 15 deadline.
- Consult professionals: Tax experts can help you choose the best calculation method and ensure filings are correct.
- File even if no tax is due: Always submit the required report to avoid penalties.
Resources for Business Owners
Utilize these resources for up-to-date information and assistance:
- Texas Comptroller of Public Accounts: Official site with filing info and forms (comptroller.texas.gov)
- Tax assistance programs: State-sponsored webinars and guides for small businesses
- Professional tax advisors: Engage experts familiar with Texas franchise tax nuances
- Internal blog resources: Visit Tax Relief Helpers Blog for detailed articles and updates
Conclusion
Navigating the Texas Franchise Tax can be complex, but understanding the fundamentals helps you avoid costly mistakes and penalties. Knowing who must file, how the tax is calculated, and when to submit your returns empowers you to manage your business’s tax responsibilities effectively.
If you’re unsure about your filing obligations or want to ensure you’re paying the least amount legally possible, consider consulting a tax professional who specializes in Texas business taxes.
Written By: Thomas Brooks
Published: December 8, 2025