How Much Is the Franchise Tax in Texas?

The Texas Franchise Tax is a state-level privilege tax imposed on businesses for the right to operate within Texas. Unlike sales tax, which is collected from consumers, the franchise tax is a direct expense for businesses. It functions similarly to a corporate income tax, although Texas does not have a personal income tax. The state revamped its franchise tax in 2008, shifting the tax base from net taxable capital to a “taxable margin.”

Who Must Pay the Texas Franchise Tax

Most entities formed or doing business in Texas are subject to the Texas Franchise Tax. Corporations, including S corporations and professional corporations, are subject to this tax. Limited liability companies (LLCs), including single-member LLCs and series LLCs, are also subject to the tax.

Beyond corporations and LLCs, the tax extends to various partnerships, such as general partnerships, limited partnerships, and limited liability partnerships. Other taxable entities include various financial institutions, professional and business associations, joint ventures, and certain business trusts. However, some entities are exempt:
Sole proprietorships (unless structured as single-member LLCs)
General partnerships owned entirely by natural persons (unless structured as limited liability partnerships)
Specific non-profit organizations or trusts
New veteran-owned businesses for their first five years if they meet specific criteria

Determining Your Taxable Margin

The Texas Franchise Tax is calculated based on a business’s “taxable margin.” Total revenue is derived from amounts reported for federal income tax purposes, with certain statutory exclusions. These exclusions can include dividends and interest from federal obligations, certain foreign royalties and dividends, and specific industry-related flow-through funds.

Businesses have four methods to determine their taxable margin, and they select the method that results in the lowest tax liability.

One method involves subtracting the Cost of Goods Sold (COGS) from total revenue. For franchise tax purposes, COGS includes direct costs of acquiring or producing goods, but specific rules and exclusions apply, particularly for indirect costs.

Another option is to subtract compensation from total revenue. Compensation includes W-2 wages and cash compensation paid to officers, directors, owners, partners, and employees, along with benefits like workers’ compensation and health care, to the extent deductible for federal income tax purposes. There is an inflation-adjusted per-person limit on the compensation deduction, which for 2024 and 2025 is $450,000.

A simpler method allows businesses to calculate their margin as 70% of total revenue. The fourth method involves subtracting $1 million from total revenue. Businesses with annualized total revenue between $2,470,000 and $20 million may be eligible to use an EZ Computation Form, which applies a flat tax rate to apportioned revenue but does not allow deductions for COGS or compensation.

For businesses conducting operations both inside and outside of Texas, the calculated margin must be apportioned to Texas. Apportionment ensures that only the portion of the margin attributable to Texas business activities is taxed. The state uses a single-factor apportionment formula based on gross receipts, considering the ratio of Texas gross receipts to total gross receipts from all sources.

Calculating the Tax Due

Once the taxable margin has been determined and apportioned to Texas, the next step is to calculate the actual tax amount. The applicable tax rate depends on the type of business activity. For most taxable entities, the general tax rate applied to their apportioned taxable margin is 0.75%. However, businesses primarily engaged in wholesale or retail trade are subject to a lower tax rate of 0.375% of their apportioned margin.

The Texas Franchise Tax includes a “no tax due” threshold. For reports originally due on or after January 1, 2024, entities with annualized total revenue of $2,470,000 or less are not required to pay the franchise tax.

To calculate the tax due, multiply the apportioned taxable margin by the applicable tax rate. For example, a non-wholesale/retail business with an apportioned taxable margin of $1,000,000 would owe $7,500 ($1,000,000 x 0.0075). A wholesale or retail business with the same margin would owe $3,750 ($1,000,000 x 0.00375). If the calculated net tax due is less than $1,000, no tax is owed.

Filing and Payment Process

The annual Texas Franchise Tax Report is due on May 15th each year. If this date falls on a weekend or legal holiday, the deadline shifts to the next business day. Businesses that cannot meet this deadline can request an extension, which extends the filing period, but it does not extend the payment deadline for any tax owed.

Filing is done electronically through the Texas Comptroller of Public Accounts website, utilizing their WebFile system. Taxpayers will need their Franchise Tax Number to log in or create an account. Entities with revenue below the “no tax due” threshold must still file an information report, such as the Public Information Report (Form 05-102) or the Ownership Information Report (Form 05-167).

Payment of the calculated tax due can also be made electronically through the WebFile system, often by electronic check. Credit card payments are an option, but they incur an additional convenience fee. For larger payments, specifically those over $1,000,000, electronic funds transfer through the TEXNET system may have specific scheduling requirements, needing initiation by 8:00 p.m. Central Time the business day before the due date. Paper checks can also be mailed with a payment voucher provided on the state return, ensuring they are postmarked by the due date. Timely filing and payment are important, as late reports are subject to a $50 penalty, and late tax payments can incur additional penalties of 5% to 10% of the tax due, along with interest after 60 days.