Texas franchise tax: what small businesses need to know
Learn how the Texas franchise tax affects your business, what you owe, and how to file with confidence.
Written by Chelsea Heywood—Small business growth and marketing writer. Read Chelsea's full bio
Published Friday 7 August 2026
Table of contents
Key takeaways
- Texas franchise tax is a privilege tax on most entities doing business in Texas, with a standard rate of 0.75% and a reduced rate of 0.375% for retail and wholesale businesses.
- If your total revenue falls below $2.47 million (2025) or $2.65 million (2026), you owe no tax, but you still need to file an information report.
- The annual filing deadline is May 15, with an automatic extension available to November 15 using Form 05-164.
- You can choose from four margin calculation methods, so picking the right one could lower your tax bill significantly.
What is the Texas franchise tax?
Texas franchise tax is a privilege tax the state charges for the right to do business in Texas. If you operate a business entity in the state, this tax applies to you regardless of whether your business turns a profit.
You may also hear it called the Texas margin tax. The tax is based on your business's taxable margin rather than net income. The name "franchise tax" can be misleading: it has nothing to do with owning or operating a franchise.
Unlike federal income tax, the Texas franchise tax doesn't consider your bottom-line profit. Instead, it looks at your revenue and allows certain deductions to arrive at a taxable margin. Texas has no state income tax for individuals, so the franchise tax is one of the state’s major business taxes.
Every taxable entity that does business in Texas, or that is chartered or organized in Texas, must file a franchise tax report each year. Even if you owe nothing, you may still be required to file.
Who has to pay Texas franchise tax?
Most business entities operating in Texas must pay franchise tax. Here's a breakdown of who's in and who's out.
Taxable entities include:
- Corporations (C-corps and S-corps)
- Limited liability companies (LLCs)
- Limited partnerships and limited liability partnerships
- Trusts and business trusts
- Joint ventures
- Banks and savings and loan associations
- Professional associations
Exempt entities include:
- Sole proprietorships (unless structured as an LLC)
- General partnerships where all partners are natural persons
- Certain passive entities that meet specific ownership and income tests
- Entities exempt under Tax Code Chapter 171, Subchapter B (certain nonprofits and governmental bodies)
If your business is located outside Texas but has nexus in the state, you're still on the hook. Nexus means having a physical presence, employees, or significant economic activity in Texas. Selling goods or services to Texas customers, maintaining inventory in the state, or having employees working in Texas can all trigger a filing requirement.
For first-year filers, your initial report covers the period from your entity's formation date through the end of the accounting period. The Texas Comptroller's office provides specific guidance on prorating your first-year tax obligation.
Texas franchise tax rates
Texas applies different franchise tax rates depending on the type of business activity and the calculation method you choose.
- Standard rate: 0.75% of taxable margin for most businesses
- Retail and wholesale rate: 0.375% of taxable margin for qualifying retailers and wholesalers
- EZ Computation rate: 0.331% of total revenue (available to businesses with $20 million or less in total revenue)
- No-tax-due threshold: $2.47 million for 2025 reports; $2.65 million for 2026 reports
If your total revenue falls below the no-tax-due threshold, you may not owe any franchise tax. You may still need to file required franchise tax-related reports, but your tax liability is zero. This threshold applies before you calculate your margin, so it's based on your gross revenue figure.
For businesses that do owe tax, the rate you pay depends on your industry classification and calculation method. Qualifying retailers and wholesalers pay half the standard rate, which can result in meaningful savings if your business fits those categories.
How to calculate your Texas franchise tax
Calculating your Texas franchise tax starts with understanding what "margin" means in this context. Your taxable margin is your total revenue minus an allowable deduction, and you get to choose which deduction works best for your business.
You have four methods to calculate your taxable margin:
- Total revenue multiplied by 70%: This is the simplest option. Multiply your total revenue by 0.70 and use that figure as your taxable margin.
- Total revenue minus cost of goods sold (COGS): If your business has significant costs tied directly to the goods you sell, this method may yield the lowest margin.
- Total revenue minus compensation: If payroll is your biggest expense, subtracting employee compensation from revenue could reduce your taxable margin the most.
- Total revenue minus $1 million: This flat deduction benefits smaller businesses with lower revenue.
To choose the best method, run the numbers for each option and pick the one that results in the lowest taxable margin. The Texas Comptroller doesn't lock you into a single method from year to year, so you can switch each filing period based on what makes the most financial sense.
If your total revenue is $20 million or less, you can opt for the EZ Computation method instead. With EZ Computation, you skip the margin calculation entirely and multiply your total revenue by 0.331%. This approach trades potential tax savings for a simpler filing process, which can be worthwhile if your time is limited.
For reports due in 2026 and 2027, the compensation deduction per employee is capped at $480,000. This limit affects businesses with highly compensated staff, so factor it into your calculations if you have employees earning above that threshold.
After you've determined your taxable margin using your chosen method, apply the appropriate tax rate (0.75% standard or 0.375% retail/wholesale) to arrive at your tax due.
Texas franchise tax due dates and extensions
The annual Texas franchise tax report is due on May 15 each year. If May 15 falls on a weekend or holiday, the deadline shifts to the next business day. This deadline applies to most entities, regardless of when your fiscal year ends.
If you need more time to file, you can request an extension to November 15 by submitting Form 05-164 and meeting the required payment thresholds. To qualify for the extension, you must either pay 90% of the tax due for the current year or 100% of the tax reported in the previous year by the original May 15 deadline. The extension gives you extra time to file the report, not extra time to pay.
For first-year filers, the timeline depends on when your entity was formed or began doing business in Texas. Your initial report is typically due on May 15 of the year following your accounting year end. The Comptroller's website provides a detailed chart for determining your specific first-year filing deadline.
If your business operates on a non-calendar fiscal year, the same May 15 deadline still applies. Your report covers the accounting period that ended in the previous calendar year. For example, if your fiscal year ends on June 30, 2025, your franchise tax report covering that period is due May 15, 2026.
How to file your Texas franchise tax report
The report you file depends on your revenue level and tax liability.
- Below the no-tax-due threshold: If your annualized total revenue is at or below the threshold, you don't need to file a franchise tax report. You only need to file a Public Information Report (PIR) or Ownership Information Report (OIR).
- EZ Computation Report: Use this if your total revenue is $20 million or less and you've chosen the EZ Computation method.
- Long Form Report: File this if your revenue exceeds $20 million or if you want to use one of the four standard margin calculation methods.
Along with your franchise tax report, you must also file either a Public Information Report (PIR) or an Ownership Information Report (OIR). Corporations, LLCs, and limited partnerships file the PIR. Other entity types file the OIR. These reports provide the state with current information about your business's officers, directors, managers, or partners.
Texas offers several ways to file your franchise tax report:
- Webfile: The Comptroller's free online filing system, and the most common method for all report types.
- Approved software: Certain third-party tax software programs are authorized for franchise tax filing.
- Paper filing: You can mail paper forms, though electronic filing is faster and reduces the chance of errors.
Payment methods vary based on the amount you owe. For amounts under $10,000, you can pay by electronic check, credit card, or paper check. If your tax liability is $10,000 or more, you must pay electronically through Webfile or TEXNET (the state's electronic payment network).
Penalties for late filing or non-payment
Filing your franchise tax report late, or missing a payment, carries real consequences. Understanding the penalty structure helps you avoid unnecessary costs.
The penalty breakdown looks like this:
- $50 late filing penalty per report filed after the deadline
- 5% penalty on the tax due if payment is one to 30 days late
- 10% penalty on the tax due if payment is more than 30 days late
- Interest starts accruing 61 days after the due date
These penalties stack, so a significantly late filing with unpaid tax can add up quickly. For example, if you file and pay 45 days late, you'll owe the $50 filing penalty plus a 10% penalty on the tax amount, plus any interest that has accrued beyond the 61-day mark.
The most serious consequence of non-compliance is forfeiture. If you fail to file your franchise tax report, the Texas Comptroller can forfeit your entity's right to transact business in the state. A forfeited entity can't sue or defend a lawsuit in Texas courts, and its officers and directors become personally liable for the entity's debts.
To reinstate a forfeited entity, you must file all outstanding reports, pay all taxes, penalties, and interest owed, and submit a reinstatement request. The process takes time and costs money, so staying current with your filings is the most straightforward path.
Texas franchise tax exemptions and credits
Several exemptions and credits can reduce or eliminate your franchise tax obligation. Knowing what's available helps you take full advantage.
Exempt entity types include:
- Sole proprietorships (not organized as LLCs)
- General partnerships composed entirely of natural persons
- Passive entities that receive 90% or more of their federal gross income from passive sources
- Certain nonprofits, veterans' organizations, and governmental entities
Beyond exemptions, Texas offers a few tax credits that can offset your franchise tax liability:
- Research and development (R&D) activities credit: Businesses conducting qualified research in Texas can claim a credit based on their qualified research expenses
- Historic structures rehabilitation credit: If you've rehabilitated a certified historic structure in Texas, you may qualify for a credit equal to 25% of eligible costs and expenses
- Business loss carryforwards: If your entity had a net business loss in a prior year, you may carry that loss forward to offset taxable margin in future years
Consult a tax professional or the Texas Comptroller's website for full eligibility requirements and claim procedures. Each credit has specific documentation and filing rules you'll need to follow.
Recent changes to the Texas franchise tax (2025-2026)
Texas regularly updates its franchise tax rules, and several changes affect reports due in 2025 and 2026. Staying current with these updates keeps your filings accurate.
Key changes to be aware of:
- IRC conformity for 2026 reports: Starting with reports due in 2026, Texas periodically updates how franchise tax calculations align with certain Internal Revenue Code (IRC) provisions, which may affect revenue and deduction calculations.. This affects how you calculate total revenue and certain deductions.
- 100% bonus depreciation: For qualifying assets acquired after January 19, 2025, Texas allows 100% bonus depreciation. You can deduct the full cost of qualifying assets in the year they're placed in service rather than spreading the deduction over several years.
- Updated no-tax-due threshold: The no-tax-due threshold increases to $2.65 million for reports due in 2026, up from $2.47 million for 2025 reports. This means more businesses fall below the threshold and owe no tax.
- Updated compensation deduction limit: For reports due in 2026 and 2027, the per-employee compensation deduction is capped at $480,000, up from the previous limit.
These changes reflect ongoing adjustments the Texas Legislature makes to keep the franchise tax aligned with federal tax rules and economic conditions. Review each update as it relates to your specific business situation, and consider working with a tax advisor to capture every available benefit.
Simplify your Texas franchise tax with Xero
Keeping track of revenue figures, filing deadlines, and deduction calculations doesn't have to be a manual process. Accounting software can help you stay organized and confident when franchise tax season arrives.
With the right tools, you can:
- Track your total revenue in real time so you always know where you stand relative to the no-tax-due threshold.
- Categorize expenses to quickly determine which margin calculation method works best for your business.
- Set reminders for the May 15 filing deadline and the November 15 extension deadline.
- Keep financial records organized and audit-ready in case the Comptroller has questions about your filing.
- Generate reports that make it easier for your tax professional to prepare your franchise tax return.
Accurate bookkeeping throughout the year makes franchise tax filing far less stressful. Instead of scrambling to pull together numbers at the last minute, you'll have clean, up-to-date records ready to go.
FAQs on Texas franchise tax
Here are answers to some of the most common questions about the Texas franchise tax.
Is Texas franchise tax the same as margin tax?
Yes. Texas franchise tax and Texas margin tax refer to the same tax. The term "margin tax" comes from the way the tax is calculated: based on your business's taxable margin rather than net income.
Do sole proprietors pay franchise tax in Texas?
No. Sole proprietorships are exempt unless structured as a single-member LLC, in which case franchise tax filing requirements apply.
What happens if you don't file Texas franchise tax?
The Texas Comptroller can impose penalties starting at $50 per late report, plus 5% to 10% of any unpaid tax. If you continue to ignore the filing requirement, the state can forfeit your entity's right to transact business in Texas, and officers or directors may become personally liable for business debts.
Can you file an extension for Texas franchise tax?
Yes. File Form 05-164 to extend your deadline from May 15 to November 15, but you must pay at least 90% of the current year's tax by the original deadline.
How do you know which margin calculation method to use?
Run the numbers using all four methods and choose the one that gives you the lowest taxable margin. You can switch methods from year to year.
Do you still need to file if revenue is below the threshold?
Yes. Even if your total revenue is below the no-tax-due threshold ($2.47 million for 2025 or $2.65 million for 2026), you must still file a Public Information Report (PIR) or Ownership Information Report (OIR). Failing to file can result in penalties and eventual forfeiture.
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