Does Texas Have a Business Income Tax?
While Texas lacks a business income tax, its franchise tax is based on margin, not profit. Learn how this unique structure determines a company's tax liability.
Texas does not have a corporate or business income tax, but instead imposes a franchise tax on most entities doing business within its borders. This tax is not based on profit but is calculated on a company’s “margin.” The franchise tax is considered a privilege tax, meaning it is the cost for the privilege of conducting business in the state.
This structure distinguishes it from income-based tax systems in other states. Because the calculation is based on margin, even some unprofitable businesses may have a tax liability.
Determining Your Franchise Tax Filing Requirement
The Texas franchise tax applies to most business structures, including corporations, limited liability companies (LLCs), S corporations, and partnerships (limited and limited liability). The requirement is broad, capturing most formal business structures that offer liability protection. The key distinction often lies in whether the business structure is a separate legal entity created under state law.
The primary exceptions are sole proprietorships and general partnerships where all partners are individuals. Other specific entities, like certain trusts and non-profits, may also be exempt.
A business must have a connection, or “nexus,” with Texas to be subject to the tax. An entity is considered to be “doing business in Texas” if it has a physical presence or meets the economic nexus threshold. A remote seller with $500,000 or more in annual gross receipts from business in Texas has economic nexus and is required to file.
A final revenue threshold determines the filing requirement. For reports due in 2025, entities with annualized total revenue at or below the “no tax due” threshold of $2.47 million are not required to file a franchise tax report.
Calculating the Texas Franchise Tax
The franchise tax calculation begins with determining a business’s total revenue, which is used to compute its taxable margin. The taxable margin is the lesser of four different calculations, providing businesses flexibility to choose the method that results in the lowest tax base. To find the margin, a business subtracts one of four available deductions from its total revenue:
- Cost of Goods Sold (COGS), which includes the costs of acquiring or producing the goods sold by the business.
- Compensation, which includes wages and benefits paid to employees, up to a certain limit per employee.
- A flat deduction of $1 million from total revenue.
- The 70% of total revenue calculation, where the taxable margin is 30% of total revenue.
Once the lowest taxable margin is determined, the appropriate tax rate is applied. The standard rate for most businesses is 0.75%, while businesses primarily engaged in retail or wholesale trades use a lower rate of 0.375%. This amount is then apportioned based on the percentage of the business’s gross receipts generated in Texas.
A simplified method, the E-Z Computation, is available for entities with annualized total revenue of $20 million or less. This method applies a 0.331% tax rate directly to the apportioned total revenue, bypassing the more complex margin calculations.
Franchise Tax Reporting Forms and Deadlines
Based on the tax calculation, a business will file one of several reports. For report years 2024 and onward, entities with revenue below the no-tax-due threshold are not required to file a No Tax Due Report. They must, however, still submit either a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167).
Businesses that qualify for and elect to use the simplified method will file the E-Z Computation Report (Form 05-169). This form is designed to reduce the compliance burden on smaller reporting entities. All other taxable entities must file the Long Form Franchise Tax Report (Forms 05-158-A and 05-158-B). This is the most comprehensive report, requiring the full margin calculation.
The annual deadline for filing all reports and paying any tax due is May 15. If this date falls on a weekend or holiday, the deadline moves to the next business day. A business can request an extension to file, which moves the deadline to November 15. An extension provides more time to file the report, not to pay the tax, and an estimated payment is required by May 15 to secure it.
How to Submit Your Report and Payment
The Texas Comptroller of Public Accounts encourages electronic filing through its Webfile system. To use Webfile, a business needs its 11-digit taxpayer number and a unique Webfile number, which is mailed to the business after it registers for a tax permit. The online portal guides the user through completing the appropriate report, whether it is the Public Information Report, E-Z Computation Report, or the Long Form.
For those who prefer to file by mail, all franchise tax forms can be downloaded from the Comptroller’s website and mailed to the address specified in the form instructions.
Payment of any tax owed can be made electronically through Webfile using funds transfer or credit card. If submitting a paper return with a tax liability, a payment voucher (Form 05-170) must be included with the mailed report. Payment should be a check or money order made payable to the Texas Comptroller, with the business’s taxpayer number and the report year written on it.