Texas does not have a corporate income tax. Instead, the state imposes a franchise tax, sometimes called a margin tax, on most formally organized businesses that operate in Texas. It is calculated on a company’s margin rather than its net profit, and for the 2026 report year, businesses with annualized total revenue of $2.65 million or less owe nothing.1Texas Comptroller of Public Accounts STAR System. Franchise Tax – Tax Rates, Thresholds and Deduction Limits Texas also has no personal income tax, a position voters wrote into the state constitution in 2019.
What Texas Charges Instead: The Franchise Tax
The franchise tax is a privilege tax collected under Chapter 171 of the Texas Tax Code.2Texas Comptroller. Franchise Tax The state treats it as the price of the legal protections and market access it gives to formally organized businesses. Unlike a corporate income tax, which would apply to bottom-line profit, the franchise tax applies to a business’s margin, which is total revenue minus certain allowable deductions.
That distinction matters. A company can show little or no federal taxable income and still owe Texas franchise tax if its revenue is high enough. The tax applies each year the entity is active or authorized to do business in the state.
Who Has to Pay
The franchise tax reaches most business structures that are recognized as separate legal entities from their owners. Taxable entities include corporations, LLCs (including single-member LLCs), limited partnerships, limited liability partnerships, S corporations, banks, savings and loan associations, professional corporations, professional associations, business trusts, joint ventures, and other entities with statutory liability protection.3Texas Comptroller of Public Accounts. Franchise Tax Overview – Section: Entities Subject to Franchise Tax
Out-of-state businesses can be on the hook too. Under Comptroller Rule 3.586, a company has Texas nexus when it has employees in the state, owns or leases property here, or maintains other physical or economic ties that create a taxable presence.4Legal Information Institute. 34 Texas Admin Code 3.586 – Margin: Nexus If your business is formed elsewhere but sells into Texas or has people or property here, review your activities carefully to see whether you have a filing obligation.
Who Doesn’t Pay
Several kinds of businesses fall outside the franchise tax, either because of how they’re organized or because they qualify for a specific exemption.
Sole Proprietorships and General Partnerships
A sole proprietorship is not a taxable entity for franchise tax purposes, because the structure does not shield the owner from personal liability. A single-member LLC that files federally as a sole proprietor is still subject to the tax, though, because the LLC itself provides that liability protection.5Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions – Section: Taxable Entities General partnerships are exempt as long as every partner is a natural person or the estate of one. Add a single corporate or LLC partner and the partnership becomes taxable.
Nonprofits
Nonprofit corporations can qualify for exemption, but not automatically. Until the Comptroller formally grants it, a nonprofit must file franchise tax reports and pay anything due.6Texas Comptroller. Guidelines to Texas Tax Exemptions Organizations with a federal 501(c)(3), (4), (8), (10), or (19) determination apply using Form AP-204 and attach the IRS letter.
Passive Entities
Some partnerships and trusts avoid the franchise tax by qualifying as passive entities under Tax Code Section 171.0003.7State of Texas. Tax Code Chapter 171 – Section: 171.0003 To qualify during the period the margin is based on, the entity must be a partnership or trust (never a corporation or LLC), draw at least 90 percent of its federal gross income from passive sources such as dividends, interest, capital gains on real property or securities, nonoperating mineral royalties, option premiums, and distributive shares of partnership income, and earn no more than 10 percent from actively conducting a trade or business.8Legal Information Institute. 34 Texas Admin Code 3.582 – Margin: Passive Entities Rental income does not count as qualifying passive income, so leasing companies won’t meet the test, and an entity with zero federal gross income doesn’t qualify either.
Grantor Trusts
A grantor trust escapes the franchise tax when all grantors and beneficiaries are natural persons or charitable entities and the trust is not classified as a business entity under IRS Treasury Regulation Section 301.7701-4(b).5Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions – Section: Taxable Entities Miss either condition and the trust is taxable.
How Much the Tax Is
The franchise tax is based on taxable margin, calculated four ways. A business picks whichever produces the smallest number:
- Total revenue minus cost of goods sold.
- Total revenue minus compensation. For the 2026 report year, the compensation deduction is capped at $480,000 per person.1Texas Comptroller of Public Accounts STAR System. Franchise Tax – Tax Rates, Thresholds and Deduction Limits
- 70 percent of total revenue.
- Total revenue minus $1 million.9Texas Comptroller of Public Accounts. Franchise Tax Overview
Once the margin is set, the rate depends on the business. Retailers and wholesalers pay 0.375 percent. Most other businesses pay 0.75 percent.
The E-Z Computation for Smaller Businesses
Businesses with total revenue of $20 million or less can use the E-Z Computation, a flat 0.331 percent on total revenue with no margin deduction math.1Texas Comptroller of Public Accounts STAR System. Franchise Tax – Tax Rates, Thresholds and Deduction Limits For companies with low cost of goods sold and low payroll, this can actually beat the standard methods. Run the numbers both ways.
The No-Tax-Due Threshold
For the 2026 report year, a business with annualized total revenue of $2.65 million or less owes no franchise tax. Since the 2024 report year, entities under the threshold no longer have to file a No Tax Due Report.10Comptroller of Public Accounts. No Tax Due Reporting for Report Year 2024 and Later They still have to file an annual information report, though, to stay in good standing.
Filing: What’s Due, and When
The franchise tax report and the accompanying information report are due May 15 each year. Which information report you file depends on your structure:11Texas Comptroller of Public Accounts. Texas Franchise Tax Public Information Report and Ownership Information Report
- Public Information Report (Form 05-102) for corporations, LLCs, limited partnerships, professional associations, and financial institutions.
- Ownership Information Report (Form 05-167) for other taxable entities such as taxable general partnerships, business trusts, and joint ventures.
Reports are filed through the Comptroller’s Webfile system.12Texas Comptroller. Texas Franchise Tax Report Forms for 2025 If you need more time, you can extend by filing Form 05-164 or making an online extension payment by May 15.13Texas Comptroller. Franchise Tax Extensions of Time to File For the extension to be valid, you must pay either 100 percent of last year’s tax or 90 percent of this year’s expected tax by that date. The extended deadline is November 15.
Underpay an extension and penalty and interest apply to whatever portion of the 90 percent wasn’t paid by May 15, plus any balance still open on November 15. File late without a valid extension and you owe a 5 percent penalty on the tax due, rising to 10 percent if it remains unpaid more than 30 days past the deadline.
What Happens If You Don’t File
Skipping reports or leaving tax unpaid can cost a business its right to transact business in Texas. A forfeited entity cannot sue or defend itself in Texas courts, which means it cannot enforce contracts, collect debts, or even answer a lawsuit until its standing is restored.14State of Texas. Tax Code Chapter 171 – Section: 171.252
The exposure reaches individuals. Under Tax Code Section 171.255, each director or officer of a forfeited corporation is personally liable, the way a partner would be, for any debt the company creates or incurs after the forfeiture date and before its privileges are revived. The rule also covers managers and members of forfeited LLCs and other taxable entities, and it captures franchise tax and penalties that accrue during the forfeiture period. Reviving the entity later does not erase liability that already attached. A director or officer escapes only by showing the debt was created over their objection, or without their knowledge in circumstances where reasonable diligence would not have revealed it.