Franchise Tax 101: Understanding Your Obligations in Texas

The Texas franchise tax is an annual privilege tax on LLCs, corporations, limited partnerships, and most other legal entities formed or doing business in Texas, and a business owes $0 of it when its annualized total revenue is $2,650,000 or less (the no-tax-due threshold for 2026 and 2027 reports). The tax is calculated on a "taxable margin" derived from revenue, not on profit, so a company that broke even can still owe. Sole proprietorships and general partnerships owned entirely by individuals are outside the tax completely.

Key takeaways:

• No-tax-due threshold: $2,650,000 in annualized total revenue for 2026 and 2027 reports, up from $2,470,000 for 2024 and 2025 reports (Texas Comptroller)
• Rates: 0.375% of taxable margin for retail and wholesale businesses, 0.75% for all others, or 0.331% of apportioned revenue under the EZ Computation (revenue of $20 million or less)
• Margin, not profit: you subtract the largest of four deductions (70% of revenue, cost of goods sold, compensation, or $1 million) from total revenue
• Below the threshold you still file: Form 05-102 (PIR) or Form 05-167 (OIR) is due every May 15, even at $0 tax
• No quarterly estimated payments: Texas franchise tax is paid once a year

This guide explains the concepts: what the tax is, who owes it, and how the calculation works. For the practical side (which forms to file, deadlines, Webfile steps, and what to do if you missed May 15) see the companion guide: Texas Franchise Tax Report Forms: Filing Requirements, Deadlines & How to Submit.

What Is the Texas Franchise Tax?

Texas has no corporate income tax and no personal income tax. Instead, the Texas Comptroller of Public Accounts collects a franchise tax: a fee businesses pay for the privilege of operating in Texas.

Unlike a traditional income tax, franchise tax is based on your business's total revenue and taxable margin, not just profits.

This distinction matters because even businesses with zero net profit might still owe franchise tax if their total revenue exceeds the state's threshold.

Who Must Pay Texas Franchise Tax?

Most registered legal entities do. If you formed an LLC, corporation, or limited partnership in Texas, or your out-of-state entity does business in Texas, you must file a franchise tax report every year; whether you also pay depends on whether your annualized total revenue exceeds $2,650,000. The Comptroller's filing requirements page has the complete entity list.

Entities Subject to Franchise Tax

The following business entities must file and potentially pay Texas franchise tax:

• Corporations (including S corporations and professional corporations)
• Limited Liability Companies (LLCs) (including single-member LLCs and series LLCs)
• Partnerships (general, limited, and limited liability partnerships)
• Banks and financial institutions
• Professional associations
• Business trusts
• Joint ventures
• Other legal entities doing business in Texas

Entities NOT Subject to Franchise Tax

The following are exempt from Texas franchise tax:

• Sole proprietorships (except single-member LLCs, which ARE taxable)
• General partnerships where all partners are natural persons (except LLPs)
• Certain nonprofit organizations
• Passive entities (meeting specific criteria)
• Certain trusts and estates
• New veteran-owned businesses (for the first 5 years, if qualified and verified through the Texas Veterans Commission)

Important: Your federal tax treatment doesn't determine your Texas franchise tax obligation. Even if your LLC is disregarded for federal tax purposes, it's still a separate legal entity for Texas franchise tax.

How to Calculate Texas Franchise Tax?

Texas franchise tax calculation involves three key steps:

Step 1: Calculate Total Revenue

Total revenue includes:

• Gross receipts from sales
• Dividends and interest
• Rents and royalties
• Capital gains/losses
• Other business income

Exclusions from revenue:

• Bad debt expense
• Foreign royalties and dividends
• Certain flow-through funds
• Subcontracting payments (for qualifying businesses)
• Healthcare provider payments from Medicare/Medicaid
• And other specific exclusions

If your accounting period covers less than 12 months, Texas compares your annualized total revenue against the threshold, not the raw figure (see the annualization example under Common Mistakes below).

Step 2: Choose Your Margin Calculation Method

Texas gives you four options to calculate your taxable margin. You can choose the method that results in the lowest tax liability:

1. Total Revenue × 70%
2. Total Revenue minus Cost of Goods Sold (COGS)
3. Total Revenue minus Compensation (capped at $480,000 per person for 2026 and 2027 reports)
4. Total Revenue minus $1 million

Important: Not all businesses qualify to use COGS. You must sell real or tangible personal property in the ordinary course of business.

Step 3: Apply the Tax Rate

Once your taxable margin is determined, it's taxed at one of two rates:

• 0.75% for most businesses
• 0.375% for qualifying wholesalers and retailers
• 0.331% if using the EZ Computation (for businesses with $20M or less in revenue)

No Tax Due Threshold: $2,650,000 for 2026 and 2027 Reports

If your annualized total revenue is $2,650,000 or less on a 2026 or 2027 report, you owe no franchise tax. You must still file a Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167) through Webfile. The threshold was $2,470,000 for 2024 and 2025 reports and adjusts for inflation every two years. The old No Tax Due Report (Form 05-163) was discontinued starting with 2024 reports; under-threshold entities file only the PIR or OIR.

Calculation Examples

Example 1: Service Business (2026 report)

• Total Revenue: $5,000,000
• No COGS (service business)
• Compensation: $2,500,000

Option 1: $5,000,000 × 70% = $3,500,000
Option 2: Not applicable (no COGS)
Option 3: $5,000,000 - $2,500,000 = $2,500,000 ← Lowest
Option 4: $5,000,000 - $1,000,000 = $4,000,000

Best margin: $2,500,000
Tax due: $2,500,000 × 0.0075 = $18,750

Example 2: Retail Business (2026 report)

• Total Revenue: $8,000,000
• COGS: $5,500,000
• Compensation: $3,000,000
• Qualifies for 0.375% rate

Option 1: $8,000,000 × 70% = $5,600,000
Option 2: $8,000,000 - $5,500,000 = $2,500,000 ← Lowest
Option 3: $8,000,000 - $3,000,000 = $5,000,000
Option 4: $8,000,000 - $1,000,000 = $7,000,000

Best margin: $2,500,000
Tax due: $2,500,000 × 0.00375 = $9,375

Example 3: Small Business (Under Threshold)

• Total Revenue: $2,200,000

Result: No tax due ($2,200,000 is below the $2,650,000 threshold), but the business must still file a Public Information Report or Ownership Information Report.

What Does "Zero Texas Gross Receipts" Mean on the Franchise Tax Report?

Webfile and the franchise tax forms ask: "Does the entity have zero Texas gross receipts?" Answer yes only if the business collected no revenue at all from Texas sources during the accounting period: no sales to Texas customers, no services performed in Texas, no Texas rental income. A Texas-based business with any revenue answers no, even when that revenue is far below the no-tax-due threshold. An entity that truly has zero Texas gross receipts (typically an out-of-state entity registered in Texas) still files an EZ Computation or Long Form report showing zero on the Texas gross receipts line, plus its PIR or OIR (Comptroller guidance).

When Is Texas Franchise Tax Due and How Do You File?

The franchise tax report is due May 15 every year, moving to the next business day when the 15th falls on a weekend or holiday. The 2026 report was due May 15, 2026; extension filers have until November 16, 2026; and the 2027 report is due Monday, May 17, 2027. Everything is filed through the Comptroller's Webfile system: the tax report, the PIR or OIR, extension requests (Form 05-164), and payments. If you don't have your 6-digit Webfile number, call the Comptroller at 800-442-3453 to retrieve it.

Filing late costs a $50 penalty per report, plus 5% of any unpaid tax (10% once payment is more than 30 days late). Interest starts 61 days after the due date at prime plus 1%, which is 7.75% for 2026 (Comptroller interest rates).

Which report you file depends on revenue: at or below $2,650,000, only the PIR (Form 05-102) or OIR (Form 05-167); between the threshold and $20 million, either the EZ Computation (Form 05-169) or the Long Form (Forms 05-158-A and 05-158-B); above $20 million, the Long Form only. Form-by-form instructions, payment options, extension mechanics, and missed-deadline recovery are covered in the companion guide: Texas Franchise Tax Report Forms: Filing Requirements, Deadlines & How to Submit.

Does Texas Require Estimated Franchise Tax Payments?

No. Texas does not require quarterly estimated payments for franchise tax; the full amount is due once a year with the May 15 report. The only prepayment scenario is an extension: for the extension to be valid, you must pay at least 90% of the tax that will be due with the current report, or 100% of the tax reported on last year's report, by the original May 15 due date.

Common Mistakes to Avoid

1. Forgetting to File When No Tax Is Due

Mistake: Assuming that if you owe no tax, you don't need to file anything.

Reality: Even if your revenue is below $2,650,000, you must still file a Public Information Report or Ownership Information Report.

Consequence: $50 late filing penalty + potential forfeiture

2. Using the Wrong Accounting Period

Mistake: Using the current calendar year instead of the correct accounting period.

Correct approach: Your 2026 report (due May 15, 2026) is based on your last federal accounting period that ended in 2025. On the report, the accounting year begin date is the day after your previous federal period ended (or your formation date, for a first report), and the end date is that last federal period end.

Example: If your fiscal year ends September 30, your 2026 franchise tax report covers October 1, 2024 through September 30, 2025.

3. Not Annualizing Revenue for Short Periods

Mistake: Reporting actual revenue for a short period without annualizing.

When to annualize: If your accounting period is less than 12 months.

Formula: (Total Revenue ÷ Days in Period) × 365

Example:

• Period: September 15 - December 31, 2025 (108 days)
• Actual revenue: $800,000
• Annualized: ($800,000 ÷ 108) × 365 = $2,703,704

Annualized total revenue of $2,703,704 exceeds the $2,650,000 threshold, so this business files a tax report even though its actual revenue was $800,000. Annualizing determines threshold eligibility only; you still report the actual $800,000 as total revenue.

4. Miscalculating Cost of Goods Sold (COGS)

Mistake: Including expenses that don't qualify as COGS.

What's NOT included in COGS:

• Officers' compensation
• Selling costs and advertising
• Distribution and shipping costs
• Interest expense
• Income taxes

What IS included:

• Direct labor costs
• Materials and supplies
• Manufacturing overhead
• Depreciation on production equipment

5. Missing the Compensation Cap

Mistake: Deducting full compensation for high earners.

Reality: Compensation is capped at $480,000 per person per 12-month period on 2026 and 2027 reports ($450,000 applied to 2024 and 2025 reports).

Example: If you pay an executive $600,000, you can only deduct $480,000.

6. Choosing the Wrong Tax Rate

Mistake: Claiming the 0.375% wholesaler/retailer rate without qualifying.

Requirements to qualify:

• More than 50% of revenue from wholesale/retail activities
• Less than 50% from products you produce (except restaurants)
• Not providing utilities (electricity, gas, telecommunications)

7. Not Keeping Adequate Records

Mistake: Discarding supporting documents after filing.

Best practice: Keep all franchise tax records for at least 4 years, including:

• Filed reports and confirmations
• Federal tax returns
• Revenue and expense documentation
• Payment receipts

8. Ignoring Combined Reporting Requirements

Mistake: Filing separately when you should file as a combined group.

When combined reporting is required:

• Entities in an affiliated group (>50% common ownership)
• Engaged in a unitary business
• Sufficient interdependence and integration

Consequence: Incorrect tax calculation and potential penalties

9. Missing Electronic Payment Requirements

Mistake: Paying by check when required to pay electronically.

EFT requirement: If you paid $10,000+ in franchise tax during the previous state fiscal year (Sept 1 - Aug 31), you must pay electronically the following calendar year.

Penalty: Additional 5% penalty for not following EFT requirements

Common Questions About Texas Franchise Tax

Do I need to file franchise tax if I just formed my LLC?

Yes. Your filing obligation begins the day your entity is formed or begins doing business in Texas. Your first annual report is due May 15 of the year following formation.

Example: An LLC formed in August 2026 files its first annual report by May 17, 2027 (May 15, 2027 falls on a Saturday).

What if my business had no activity or revenue?

You still must file. Report zero revenue and file the required Public Information Report or Ownership Information Report.

Can I amend a franchise tax report after filing?

Yes. File an amended report with:

• All pages of the corrected report
• "AMENDED" written at the top
• Cover letter explaining the changes
• Supporting documentation

If requesting a refund, the claim must comply with Texas Tax Code Section 111.104.

Does Texas franchise tax apply to out-of-state businesses?

Yes, if you're "doing business" in Texas. This includes:

• Having a physical presence in Texas
• Employing people in Texas
• Owning/leasing property in Texas
• Earning more than $500,000 in annual gross receipts from Texas (economic nexus, even with no physical presence)

What is the minimum franchise tax?

There is no minimum tax. If your calculated tax is less than $1,000, you owe $0 (but must still file reports).

Exception: Tiered partnership elections—both upper and lower tier entities owe any calculated amount, even if under $1,000.

Can I get a refund if I overpaid?

Yes. File an amended report with a cover letter explaining the overpayment. The statute of limitations for refund claims is generally 4 years from the due date of the report.

What happens if I close my business?

A Texas entity that terminates, converts, or merges files a final report; an out-of-state entity files within 60 days of ceasing to have nexus in Texas. To officially terminate a Texas entity, you must:

1. File the final franchise tax report and pay any tax due
2. Obtain a Certificate of Account Status for Dissolution or Termination from the Comptroller
3. File termination documents with the Secretary of State by December 31 to avoid picking up another report year

How do I check my franchise tax account status or get a certificate of good standing?

What most states call a certificate of good standing, the Texas Comptroller issues as a certificate of account status. Visit the Franchise Account Status website to:

• View filed reports
• Check payment history
• Verify good standing
• Request a certificate of account status

What if I disagree with a franchise tax assessment?

You have the right to:

1. Request a redetermination — File within 60 days of the assessment
2. Request a hearing — If redetermination is denied
3. Appeal to district court — If hearing decision is unfavorable

Contact the Comptroller's office immediately if you receive an assessment you believe is incorrect.

Industry-Specific Considerations

For LLCs

Single-Member LLCs:

• ARE subject to franchise tax (even though disregarded for federal tax)
• Must file Public Information Report
• Can deduct owner's compensation (net distributive income)

Multi-Member LLCs:

• File as partnership or corporation (depending on federal election)
• Each member's compensation capped at $480,000 (2026-2027 reports)

For Partnerships

General Partnerships (all natural persons):

• NOT subject to franchise tax
• No filing requirement

Limited Partnerships and LLPs:

• ARE subject to franchise tax
• Must file Ownership Information Report
• May qualify as passive entity (if 90%+ passive income)

For Corporations

C Corporations:

• Subject to franchise tax
• Must file Public Information Report
• Officer compensation capped at $480,000 per person (2026-2027 reports)

S Corporations:

• Subject to franchise tax (same as C corps for Texas purposes)
• Shareholder distributions treated as compensation
• Must file Public Information Report

For Professional Service Providers

Doctors, Lawyers, Accountants, Consultants:

• Typically cannot use COGS deduction
• Compensation deduction usually most beneficial
• Professional associations must file

For Retail and Wholesale Businesses

Benefits:

• Qualify for reduced 0.375% tax rate
• Can use COGS deduction
• Must meet specific criteria (see SIC code requirements)

Requirements:

• More than 50% revenue from retail/wholesale
• Less than 50% from self-produced goods (except restaurants)
• Cannot provide utilities

For Manufacturing and Production

COGS Considerations:

• Can include direct labor, materials, and overhead
• Depreciation on production equipment included
• Must track costs carefully

Section 179 Deduction:

• Can include in COGS for Texas purposes
• Different treatment than federal

For Real Estate Businesses

Rental Property Owners:

• Rental income included in total revenue
• May qualify as passive entity
• Depreciation can be included in COGS (if selling property)

Real Estate Investment Trusts (REITs):

• May qualify for exemption if meeting specific criteria
• Must file to affirm qualification

For Technology and Software Companies

Software Sales:

• Treated as tangible personal property for COGS purposes
• Development costs may qualify as COGS
• Licensing revenue included in total revenue

For Healthcare Providers

Special Exclusions:

• 100% of Medicare/Medicaid revenues (including copays, deductibles)
• CHIP and TRICARE revenues
• Workers' compensation claims
• Actual costs for uncompensated care

Healthcare Institutions:

• Can exclude only 50% of the above (hospitals, nursing homes, etc.)

Texas Tax Compliance Checklist

Annual Requirements

✅ Texas Franchise Tax — Due May 15 annually

• File franchise tax report (if revenue > $2,650,000)
• File Public Information Report or Ownership Information Report
• Pay any tax due

✅ Sales Tax — If selling taxable goods/services

• State rate: 6.25%
• Local rates: up to 2% additional
• Total: up to 8.25%
• Check your local tax rate

✅ Federal Tax Returns

• C Corp: Form 1120
• S Corp: Form 1120S
• Partnership: Form 1065
• LLC: Varies by election

✅ Public Information Report

• Filed with the Comptroller alongside the franchise tax report
• Texas has no separate annual report to the Secretary of State for LLCs and for-profit corporations; the PIR serves that role
• Nonprofit corporations instead file a periodic report only when the Secretary of State requests one

Local Requirements

✅ Business Licenses and Permits

• City-specific requirements
• Professional licenses
• Health permits (if applicable)
• Verify city-specific rules

✅ Property Tax (if applicable)

• Business personal property
• Real estate
• Due January 31

Employment Taxes (if you have employees)

✅ Federal:

• Payroll taxes (FICA)
• Federal unemployment (FUTA)
• Income tax withholding

✅ Texas:

• Unemployment tax (SUTA)
• No state income tax withholding

Franchise Tax Changes for 2026 and 2027 Reports

No Tax Due Threshold: $2,650,000 for 2026 and 2027 reports, up from $2,470,000 for 2024 and 2025 reports. The threshold adjusts for inflation every two years.

Compensation Deduction Limit: $480,000 per person, up from $450,000.

Tax Rates: Unchanged

• 0.75% for most businesses
• 0.375% for wholesalers/retailers
• 0.331% for EZ computation (revenue of $20 million or less)

Forms: Form 05-163 (No Tax Due Report) remains eliminated; entities below the threshold file only the PIR or OIR. The current-year instructions booklet is Form 05-915, 2026 Texas Franchise Tax Report Information and Instructions (PDF).

Veteran-Owned Businesses: A qualifying new veteran-owned business pays no franchise tax and files no PIR or OIR during its first five years. To qualify, the entity must be formed in Texas on or after January 1, 2022 (or during the earlier 2016-2019 window), be 100% owned by honorably discharged veterans, and submit a Letter of Verification from the Texas Veterans Commission with Form 05-904. Details: Comptroller veteran-business page.

Combined Groups: A combined group at or below the threshold files no tax report, Affiliate Schedule, or Common Owner Information Report, but each member organized in Texas or with Texas nexus still files its own PIR or OIR.

Next Steps: Your Franchise Tax Action Plan

Before the Next May 15 Deadline (May 17, 2027 for the 2027 Report)

• Gather your federal tax return for the accounting period
• Collect revenue and expense records
• Determine your NAICS and SIC codes
• Obtain your Texas Taxpayer Number and Webfile Number (call 800-442-3453 if you don't have it)
• Calculate your total revenue and determine if you're above/below the $2,650,000 threshold
• Choose your margin calculation method (if applicable)
• File your franchise tax report and PIR/OIR via Webfile
• Pay any tax due electronically
• Save confirmation and payment receipts

Missed the May 15, 2026 deadline? The recovery steps (penalties, interest, and Form 05-211 forfeiture notices) are in the companion filing guide.

Throughout the Year

• Maintain accurate financial records
• Track revenue monthly to project next year's obligation
• Update business information with Secretary of State if changes occur
• Monitor for any franchise tax law changes
• Consider working with a tax professional for complex situations

If You're Starting a New Business

• Understand your filing obligation begins immediately upon formation
• Register with the Texas Comptroller
• Obtain your Texas Taxpayer Number
• Calendar May 15 of the year after formation for your first report
• Set up accounting systems to track franchise tax components
• Apply for the veteran-owned business exemption if you qualify

Additional Resources

Official Texas Comptroller Resources

• Webfile System: comptroller.texas.gov/taxes/file-pay
• Franchise Tax Overview: comptroller.texas.gov/taxes/franchise/
• 2026 Franchise Tax Instructions (Form 05-915): comptroller.texas.gov/forms/05-915.pdf
• Franchise Tax Forms: comptroller.texas.gov/taxes/franchise/forms/
• Account Status Check: comptroller.texas.gov/taxes/franchise/coas-instructions.php
• Franchise Tax FAQs: comptroller.texas.gov/taxes/franchise/faq/

Contact Information

Texas Comptroller of Public Accounts

• Phone: 800-442-3453 (toll-free)
• Local: 512-463-4600
• Email: [email protected]
• Mailing Address: P.O. Box 149348, Austin, TX 78714-9348

Webfile Number Retrieval:

• Call 800-442-3453
• Automated system requires taxpayer number and identifying information

Helpful Tools

• NAICS Code Lookup: census.gov/naics
• SIC Code Lookup: osha.gov/pls/imis/sicsearch.html
• Penalty and Interest Calculator: comptroller.texas.gov/taxes/file-pay/penalties.php

Final Thoughts

The Texas franchise tax comes down to two questions. First, is your annualized total revenue above $2,650,000? If not, you owe nothing and only file the PIR or OIR. Second, if you are above it, which margin method (70% of revenue, COGS, compensation, or the flat $1 million) produces the lowest taxable margin?

Even at $0 tax, the annual report filing is what keeps your right to do business intact. Skipping it is the most common way Texas businesses drift into forfeiture, where the entity loses access to Texas courts and owners can become personally liable for entity debts. File every year, keep records for 4 years, and check your account status if you're ever unsure.

Margin Methods You Can Actually Compare: How Jupid Helps

Choosing between the COGS, compensation, and 70% methods only works if your books can produce those totals. Jupid, an AI accountant for small businesses, connects to your business bank account and categorizes every transaction automatically with 95.9% accuracy, so revenue, cost of goods, and payroll totals are ready when the May 15 report comes around. Forward receipts through WhatsApp or iMessage as they happen, and ask bookkeeping questions in chat instead of digging through spreadsheets in the second week of May.

Try Jupid

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Disclaimer: This guide provides general information about Texas franchise tax and should not be considered legal or tax advice. Tax laws change frequently, and every business situation is unique. Consult with a qualified tax professional or attorney for advice specific to your circumstances.

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Last Updated: July 11, 2026

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References and Sources

1. Texas Comptroller of Public Accounts – Franchise Tax (rates, thresholds, deduction limits): comptroller.texas.gov/taxes/franchise/

2. Texas Comptroller – Franchise Tax Filing Requirements: comptroller.texas.gov/taxes/franchise/filing-requirements.php

3. Texas Comptroller – 2026 Texas Franchise Tax Report Information and Instructions (Form 05-915): comptroller.texas.gov/forms/05-915.pdf

4. Texas Comptroller – No Tax Due Reporting for Report Year 2024 and Later: comptroller.texas.gov/taxes/franchise/ntd-rpt-updates-2024.php

5. Texas Comptroller – Interest Owed and Earned: comptroller.texas.gov/taxes/file-pay/interest.php

6. Texas Comptroller – Penalties for Past Due Taxes: comptroller.texas.gov/taxes/file-pay/penalties.php

7. Texas Comptroller – New Veteran-Owned Businesses and Texas Franchise Tax: comptroller.texas.gov/taxes/franchise/veteran-business.php

8. Texas Tax Code Chapter 171 – Franchise Tax: statutes.capitol.texas.gov

9. Texas Secretary of State – Business Organizations: sos.state.tx.us/corp/