How Much Is the Texas Franchise Tax?

The Texas franchise tax is an annual levy on taxable entities for the privilege of doing business in the state. It is not an income tax in the traditional sense, but rather a tax calculated on a business’s margin. Understanding this tax is essential for businesses operating within the state to ensure compliance and avoid potential penalties.

Who Must Pay

Most legal entities formed or doing business in Texas are subject to the Texas franchise tax. This includes:
Corporations
Limited liability companies (LLCs), including single-member LLCs and series LLCs
Banks
Various partnerships, such as general, limited, and limited liability partnerships
Trusts
Professional associations
Joint ventures

Certain entity types are excluded from this tax. Sole proprietorships are exempt, unless structured as single-member LLCs. General partnerships composed solely of natural persons are also excluded, though this exemption does not extend to limited liability partnerships.

Determining the Taxable Amount

The Texas franchise tax is based on a taxable entity’s “margin,” which can be calculated using one of four distinct methods. Businesses may choose the method that results in the lowest tax liability. These methods include:
Multiplying total revenue by 70 percent
Deducting the cost of goods sold (COGS) from total revenue
Subtracting compensation paid to employees and directors from total revenue, subject to an annual per-person limit of $450,000 for reports due in 2024 and 2025
Deducting $1 million from total revenue

For entities doing business both inside and outside Texas, the calculated margin must be apportioned to the state. This apportionment uses a single-factor formula based on gross receipts. The numerator of this fraction is the taxable entity’s gross receipts from business done in Texas, while the denominator is the entity’s total gross receipts from its entire business. The resulting apportioned margin is then subject to the applicable tax rate.

The standard tax rate for most entities is 0.75 percent of their apportioned margin. Businesses primarily engaged in retail or wholesale trade benefit from a lower tax rate of 0.375 percent. A simplified “EZ Computation” method is available for entities with total revenue between $2.47 million and $20 million, applying a rate of 0.331 percent of apportioned total revenue. Entities using the EZ Computation cannot claim deductions for COGS or compensation.

Exemptions and Thresholds

Even if an entity is subject to the Texas franchise tax, specific exemptions and thresholds can result in no tax being due. For reports originally due on or after January 1, 2024, a “no tax due” threshold has been set. Taxable entities with annualized total revenue equal to or less than $2.47 million are not required to pay the franchise tax.

Beyond this revenue threshold, other specific types of entities are exempt from the tax, including:
Certain passive entities, defined by income primarily stemming from passive sources like dividends, interest, and certain real estate activities
Qualifying real estate investment trusts (REITs)
Non-profit organizations
New veteran-owned businesses, for their first five years of operation, provided they meet specific ownership and revenue criteria

While entities below the “no tax due” threshold are no longer required to file a Franchise Tax Report (Form 05-163) as of 2024, they must still file an information report. This takes the form of a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167).

Preparing for Filing

Before a business can complete and submit its Texas franchise tax report, it must gather and organize specific financial and organizational information. Key documents needed include income statements, balance sheets, and detailed records pertaining to the cost of goods sold. Comprehensive compensation data, including W-2 wages and benefits provided to personnel, is also essential for those choosing the compensation deduction method.

Businesses also need to verify and update their basic identifying details, such as their Texas taxpayer number, Secretary of State file number, and fiscal year dates. Industry classification codes, such as the North American Industry Classification System (NAICS) code, are required for proper reporting.

Filing the Tax Return

The procedural steps for submitting the Texas franchise tax report occur after all necessary information has been assembled. The primary method for filing is electronically via the Texas Comptroller’s Webfile system. This online platform allows businesses to submit their reports efficiently.

Payment options for any tax due are integrated into the electronic filing system, including Web Electronic Funds Transfer (EFT) or credit card payments. Alternatively, payments can be made through approved electronic submission software providers or by check. The annual filing deadline for the Texas franchise tax report is May 15. If May 15 falls on a weekend or legal holiday, the due date shifts to the next business day.

Businesses unable to file by the original deadline can request an extension, extending the filing due date to November 15. While an extension provides additional time to file the report, it does not extend the deadline for payment; any tax owed is still due by the original May 15 deadline. Late filing incurs a $50 penalty per report, and late payments are subject to a 5 percent penalty if paid within 1-30 days after the due date, increasing to 10 percent if paid more than 30 days late.