How to Pay Your Franchise Tax in Texas

The Texas Franchise Tax is a levy imposed on entities for the privilege of conducting business within the state. It is not a tax on income or property, but rather a tax calculated on a company’s margin. This structure means the amount owed is tied to a measure of a business’s economic substance, rather than its net profit alone. The tax applies to most business structures, and determining if your entity is subject to the tax is the first step.

Determining Your Filing Requirement

Your obligation to file a Texas Franchise Tax report depends on your business’s legal structure and its total revenue. Corporations, limited liability companies (LLCs), S corporations, professional associations, and limited partnerships are among the taxable entities required to file annually. Sole proprietorships and general partnerships where the partners are exclusively natural persons are not considered taxable entities and therefore have no filing requirement.

Effective for reports due on or after January 1, 2024, the revenue threshold for owing no tax was increased to $2.47 million. If your business’s annualized total revenue is at or below this amount, you will not owe any franchise tax. The requirement to file a “No Tax Due Report” has been eliminated for these businesses. Instead, they are only required to submit an annual Public Information Report (PIR) or an Ownership Information Report (OIR).

For those entities that are subject to the tax, even if they fall below the $2.47 million revenue threshold, the obligation to file an information report remains, with a due date of May 15.

Information and Forms for Filing

Before you can calculate or submit your franchise tax, you must gather specific financial data and identify the correct reporting form. The necessary information is primarily derived from your entity’s federal income tax return. You will need your total revenue, which serves as the starting point for all calculations, and potentially detailed figures for cost of goods sold (COGS) or total compensation.

For businesses with annualized total revenue of $20 million or less, the EZ Computation Report is an option. This form simplifies the calculation process by applying a fixed tax rate to your apportioned total revenue. If your revenue exceeds $20 million, or if you choose not to use the EZ Computation method, you must file the Long Form. All official forms, including the Public Information Report (Form 05-102) and Ownership Information Report (Form 05-167), can be found on the Texas Comptroller of Public Accounts website.

Calculating the Franchise Tax Owed

The franchise tax is the calculation of your entity’s taxable margin, which is then multiplied by the applicable tax rate to determine the amount you owe. “Margin” is calculated by determining your total revenue and then applying one of four possible deductions. A business is permitted to select the calculation method that results in the lowest taxable margin, thereby minimizing its tax obligation.

The four methods for calculating your margin are:

• Total revenue minus cost of goods sold (COGS)
• Total revenue minus compensation
• Total revenue multiplied by 70%
• Total revenue minus a $1 million deduction

The COGS deduction is available to businesses that sell real or tangible personal property. The compensation deduction is based on wages and benefits paid, but the amount is subject to a per-person limit of $450,000.

Once you have calculated your margin using the most advantageous method, you must apportion it to Texas based on your gross receipts from business done in the state. The resulting apportioned margin is your tax base. This amount is then multiplied by the relevant tax rate. The standard tax rate is 0.75%, but for entities primarily engaged in retail or wholesale trades, a lower rate of 0.375% applies. Businesses using the EZ Computation Report will use a rate of 0.331%. If the calculated tax is less than $1,000, no tax is due, though a report must still be filed.

Submitting Your Report and Payment

After completing the appropriate report and calculating any tax owed, the final step is to submit the documents and payment to the state. The Texas Comptroller of Public Accounts offers several methods for filing and payment, prioritizing electronic transactions. The primary method is the Comptroller’s WebFile system, an online portal that allows for both the submission of the franchise tax report and payment. Using WebFile provides immediate confirmation of receipt.

For businesses that use professional tax software, many approved third-party products can prepare and electronically file the report. If electronic filing is not an option, you can mail the physical, completed paper form to the Comptroller’s office. The mailing address is available on the form instructions.

Payment can be made concurrently with the filing. If filing through WebFile, you can authorize an electronic payment from a bank account. Other electronic options include credit card payments, which may involve a third-party processing fee, and electronic funds transfer (EFT). If you are mailing a paper return and owe tax, you should include a check or money order for the full amount due, made payable to the Texas Comptroller. Upon successful submission, you will receive a confirmation number for your records.