What Is a Franchise Tax in Texas? Your 101 Guide to Rules and Deadlines
Texas franchise tax made simple: who must file, the $2.47M no-tax-due threshold, how margin is calculated, May 15 deadlines, plus mistakes to avoid!
Written by: Caleb Johnson
Date of publication: 30.12.2025
Table of Contents
If you run a business in the Lone Star State, franchise tax is something you cannot afford to ignore. In fiscal year 2025 alone, the state collected about $7.08 billion in franchise tax revenue, a 3.2% increase year over year. That number tells you exactly how central this tax is to Texas business compliance. Maintaining strict adherence to state regulations is vital for long-term success; you can learn more about why accounting compliance is important for your company to avoid unnecessary risks.
- Texas franchise tax is unavoidable for most businesses. It’s the state’s primary business tax, generating over $7 billion annually, and applies to most formal business entities operating in or doing business with Texas—regardless of profitability.
- It’s a privilege tax based on revenue, not profit. Texas franchise tax is calculated on a business’s taxable margin, starting from total revenue and allowing specific deductions—not on net income like federal taxes.
- The $2.47 million “no tax due” threshold is a major small-business win. Businesses with $2.47M or less in annual revenue owe no franchise tax, but they must still file required information reports to stay compliant.
- Most LLCs, corporations, and partnerships must file. Corporations, LLCs (including single-member and series LLCs), partnerships, S corps, and out-of-state entities with Texas economic nexus are generally required to file.
- May 15 is the non-negotiable deadline. Franchise tax reports and payments are due May 15 every year. Extensions don’t delay payment, and missing the deadline triggers an automatic $50 penalty, even if no tax is owed.
- Calculation choices and filing accuracy matter. Businesses can choose from multiple margin calculation methods, and selecting the wrong one—or misreporting revenue—can lead to overpaying or penalties. Running all options and filing correctly is key.
Texas Franchise Tax 101: Key Facts for Businesses
So, what is a franchise tax in Texas? In layman’s terms, it’s the state’s primary business tax. The tax has been around for over a century, morphing from a tax on capital stock to its current form as a tax on your business’s “margin.”
The modern system, launched in 2008, was a game-changer. It broadened the net to include more entity types like partnerships and moved the calculation to taxable margin (revenue minus certain deductions). This shift initially boosted state collections by over 40%.
Since then, the rules have continued to shift. A major win for small businesses came in 2023, when the “no tax due” threshold was permanently raised to $2.47 million in annual revenue (for reports due in 2024 and beyond). Even better, if you’re under that threshold, you’re exempt from paying the tax, but still required to file information reports.
What Is a Franchise Tax in Texas?
When a financial expert talks about “what is Texas franchise tax?”, they’re not talking about federal income tax or a fee to run a franchise like a fast-food chain. Think of it as Texas’s version of a corporate “privilege tax.” You pay it for the privilege of doing business in the Lone Star State, whether you turned a profit or not.
Who Oversees Franchise Tax Collection?
The Texas Comptroller of Public Accounts administers and enforces the franchise tax. The state agency sets the rules, provides the forms, and runs the Webfile system where you’ll submit your annual report and payment.
Who Has to Pay Texas Franchise Tax?
If you’ve formed a formal business entity in Texas or you’re doing a significant amount of business here, this tax likely applies to you. The long and short of it is that what is Texas franchise tax based on isn’t just your location, but your legal structure and activity.
Entity Types That Must File
The list is pretty broad, but it targets formal business structures. If you’re a corporation, an LLC (including single-member and series LLCs), a professional association, or a general or limited partnership, you’re almost certainly on the hook. This also applies to S corporations, banks, trusts, and business associations. Since filing requirements vary by structure, it is helpful to understand the tax differences between C corporations and S corporations when determining your liabilities.
The key point for out-of-state companies is “nexus,” which essentially means you have a substantial economic presence in Texas, such as maintaining a warehouse, having employees, or meeting revenue thresholds that are generally considered to establish economic nexus.
Who Is Exempt from Franchise Tax?
There are a few clear exceptions that can save you the paperwork. First, true sole proprietorships, unincorporated political committees, and real estate mortgage investment conduits are generally exempt. Many nonprofits, like certain educational organizations or charities, also qualify for exemptions. While exempt from certain taxes, these organizations still face complex reporting requirements, which is why many turn to outsourced accounting for nonprofits to maintain their status.
Confused by Texas Franchise Tax Filing Requirements?
Texas Franchise Tax Calculation Explained
The tax is calculated using a margin-based approach tied to total revenue, not net profit. The state allows businesses to choose from several calculation methods, then applies the appropriate tax rate. Understanding “what is Texas franchise tax” helps business owners plan ahead and avoid surprises when filing season arrives. Strategic preparation is the best way to protect your bottom line – explore these 6 benefits of tax planning for your business to see how proactive management pays off.
What Is Texas Franchise Tax Based On?
The calculation starts with total revenue pulled from your federal return, minus specific statutory exclusions. From there, businesses calculate margin using one method that works best for them. Options include subtracting cost of goods sold, subtracting compensation, applying the 70 percent rule, or using the flat one million dollar deduction, where allowed.
Tax Rates and Thresholds
Once the margin is calculated, Texas applies different tax rates based on industry type. Retailers and wholesalers pay 0.375 percent, while most other businesses pay 0.75 percent. If total revenue is $2.47 million or less, no tax is owed. However, filing is still required to remain in good standing.
Filing Deadlines and Payment Rules
To stay compliant, you need two things: a plan and a calendar reminder. The table below breaks down the key dates and options. Treat this as your cheat sheet.
Requirement | Key Details | Deadline/Method |
Annual Filing | File a report, even if no tax is due. New rules for 2024. | May 15 (or next business day) |
Payment | Pay any tax owed to avoid penalties & interest. | Due for filing on May 15 |
Late Penalty | Assessed for any report filed after the due date. | $50 flat fee |
Recommended Method | Fastest processing & confirmation. | Online via Texas Comptroller Webfile |
To ensure you haven’t missed any other federal or state requirements, refer to our comprehensive tax preparation checklist for small businesses.
Annual Deadline (May 15)
May 15 is your non-negotiable deadline every year. If it falls on a weekend or holiday, you get until the next business day. You can request an extension to file, but here’s the catch: it doesn’t extend your time to pay. Any tax you estimate owing is still due by May 15 to avoid penalties and interest.
Common Forms and Filing Options
Which form you use depends entirely on your revenue and how you choose to calculate your tax. The main paths are:
- EZ Computation Form: For businesses with revenue up to $20 million, offering a simpler calculation at a 0.331% rate.
- Long Form (Form 05-102): The standard form for all other entities, where you’ll detail your chosen margin calculation method.
Mistakes to Avoid in Franchise Tax Reporting
Misreporting revenue or selecting the wrong method
The biggest error is using the wrong revenue figure from your federal return without making the state-specific exclusions. Also, not running all four margin calculation methods to pick the smallest one can leave money on the table.
Missing deadlines or ignoring thresholds
Thinking “I don’t owe, so it can wait” is a costly trap. The $50 late penalty hits as soon as May 15 passes, even for a $0 report. Don’t just assume you’re under the threshold; verify your annual revenue.
Failing to file no-tax-due reports
For 2024 and beyond, if your revenue is below the $2.47 million threshold, you do not file a franchise tax report. However, you must still file an annual Information Report (like the Public Information Report). Missing this separate requirement can still cause issues.
Conclusion: Use This 101 Guide to Stay Compliant
Getting “what is franchise tax in Texas” right doesn’t have to be a headache. Utilize this guide, set a calendar reminder for deadlines, and review your numbers well before May 15. If your situation is complex, consulting with a knowledgeable CPA is always a smart move. Our team provides expert tax advisory and preparation services to help you navigate these calculations with precision.
FAQ
- Q1: What’s the difference between the Texas franchise tax and the federal income tax?
A: The Texas franchise tax is a state “privilege” tax tied to your business's margin/total revenue. Federal income tax is based on taxable income and is filed with the IRS.
- Q2: Do I owe the Texas franchise tax if my business didn’t make a profit?
A: Possibly. Franchise tax is based on revenue and margin - not profit. Even with a loss, you may still need to file (and could owe taxes), depending on your total.
- Q3: What does “no tax due” mean, and do I still have to file?
A: If your annual revenue is at or below the no-tax-due threshold, you generally don’t owe tax. You may still be required to submit the required information reports to stay in good standing.
- Q4: How do I choose the best margin calculation method?
A: Run the allowed options (cogs, compensation, 70% rule, and the flat deduction where eligible) and pick the method that produces the lowest taxable margin.
- Q5: What is “nexus” and why does it matter for out-of-state companies?
A: Nexus means you have a substantial presence in Texas (e.g., employees, warehouse, or certain revenue activity). If you have nexus, Texas can require you to file and potentially pay.
- Q6: What happens if I file after May 15?
A: Late filing can trigger a $50 penalty even if you owe $0, plus interest/penalties if payment was due. If May 15 is a weekend/holiday, the deadline shifts to the next business day.
- Q7: Can I get an extension, and does it extend the payment too?
A: You can request extra time to file, but it typically doesn’t extend the time to pay. Any estimated tax owed is still due by the original deadline to avoid penalties and interest.
