Franchise Tax and Taxable Entity Status in Texas

If your business has limited-liability protection under Texas law, it is a taxable entity for the Texas franchise tax and must file a report each year, even when no tax is owed. That reach covers corporations, limited liability companies, limited partnerships, limited liability partnerships, professional associations, business trusts, and S-corporations. For the 2026 report year, any taxable entity with annualized total revenue of $2,650,000 or less owes zero franchise tax.¹

Which Businesses Count as Taxable Entities

The franchise tax reaches nearly every business that enjoys limited liability in Texas. Corporations, LLCs, LPs, LLPs, professional associations, and business trusts all qualify. S-corporations are in as well, despite their federal pass-through treatment. The state’s logic is that a statutory liability shield is a privilege worth taxing.²

Where the entity was formed does not matter. A Delaware LLC or a Nevada corporation is still a taxable entity if it has nexus with Texas. Nexus generally means physical presence in the state — employees, an office, a warehouse — or enough business activity to establish an economic connection. Out-of-state entities doing business here typically must register as a foreign entity with the Secretary of State and file franchise tax reports the same as a Texas-formed company.

Businesses That Are Not Taxable Entities

Sole proprietorships sit entirely outside the franchise tax system because the owner and the business are the same legal person. General partnerships composed only of natural persons — individual people, not other entities — are also excluded. Neither structure receives the statutory liability shield that triggers the tax.

On top of those structural exclusions, Texas law exempts specific organizations:

Nonprofit corporations exempt from federal income tax under IRC Section 501(c)(3), (4), (5), (6), (7), (8), (10), or (19), and certain supporting organizations under Section 501(c)(2) or (25).³
Nonprofit hospitals, religious organizations, educational and charitable organizations, and private or parochial schools, each under its own statutory provision.
Cooperative associations, farmers’ cooperatives, and marketing associations organized under the applicable Texas codes.
Charitable trusts and nonprofit cemetery corporations.

Exempt organizations still have to file evidence of their exempt status with the Comptroller, and the exemption lasts only as long as the underlying federal or state exempt status does.³ Lose the federal exemption, and the franchise tax obligation begins.

Passive Entities

Some entities remain taxable but owe nothing because they qualify as “passive.” The label is worth pursuing when income comes overwhelmingly from investments rather than active operations, though the requirements are strict.

Three conditions must hold for the entire accounting period:

The entity must be a general or limited partnership, or a trust other than a business trust. Corporations and LLCs cannot qualify.⁴
At least 90% of federal gross income must come from qualifying passive sources.
No more than 10% of federal gross income can come from an active trade or business.

Qualifying passive income includes dividends, interest, capital gains from selling real property or securities, gains from commodities traded on an exchange, royalties and delay rental income from mineral properties, option premiums, and distributive shares of partnership income. Rental income does not count.⁵ Real estate partnerships often assume they qualify and find out otherwise. Passive entities still file franchise tax reports; they just owe no margin tax while every criterion holds.

How the Tax Is Calculated When It Applies

The franchise tax is based on “taxable margin,” not on profit. The calculation starts with total revenue and applies one of several reductions. The entity picks whichever produces the lowest margin.

Margin Computation Methods

A taxable entity computes its margin as the lesser of:

70% of total revenue
Total revenue minus cost of goods sold
Total revenue minus compensation
Total revenue minus $1 million

The entity then apportions margin to Texas using the ratio of Texas receipts to total receipts and subtracts any other allowable deductions.⁶ A payroll-heavy service business often does best under the compensation deduction. A distributor or manufacturer with heavy material costs may do better with COGS. Running all four methods before filing pays off.

Tax Rates

For the 2026 and 2027 report years:

0.75% of taxable margin for most entities
0.375% of taxable margin for entities primarily engaged in retail or wholesale trade⁷

A taxable entity owes nothing if the computed tax is less than $1,000 or if annualized total revenue is $2,650,000 or less.¹

EZ Computation

Entities with total revenue of $20 million or less can elect the EZ computation. Instead of picking among the four margin methods, the entity multiplies apportioned total revenue by a flat 0.331%.⁸ You give up the COGS and compensation deductions in exchange. For businesses with thin margins or high deductible costs, the standard computation often produces a smaller bill. For lean-cost businesses, the EZ rate wins.

What and When to File

Franchise tax reports are due May 15 each year. When that date falls on a weekend or legal holiday, the deadline shifts to the next business day. The Comptroller grants an extension if the entity submits the extension request form on or before the original due date.⁹

What you file depends on revenue:

At or below the no-tax-due threshold ($2,650,000 for 2026): no No Tax Due Report is required, but the Public Information Report is.¹⁰
Above the threshold and eligible for EZ: file the EZ Computation Report with the Public Information Report.
Above the threshold and not using EZ: file the Long Form Report (Form 05-158) with full margin calculations.¹⁰

Webfile is the Comptroller’s electronic filing and payment system. You will need your 11-digit Texas taxpayer number and the Webfile number beginning with “XT” from Comptroller correspondence.¹¹ The system issues an immediate confirmation that serves as proof of timely filing.

Penalties and Forfeiture for Missing the Deadline

Late penalties are percentage-based and stack quickly:

1 to 30 days late: 5% of tax due
More than 30 days late: 10%
After a Notice of Tax Due: an additional 10%, for 20% total¹²

Interest starts accruing 61 days after the due date.¹³ The bigger risk is forfeiture. The Comptroller can forfeit an entity’s right to transact business in Texas, and a forfeited entity cannot sue or defend lawsuits in Texas courts until it clears its outstanding obligations and restores its status.¹⁴ Restoration means filing every missing report, paying all back taxes, penalties, and interest, and, if the entity is registered with the Secretary of State, ensuring that registration is current.

When Affiliated Businesses Must File Together

Affiliated businesses that operate as a single economic enterprise file a combined group report rather than separate returns. Texas defines a combined group as taxable entities that form an affiliated group engaged in a unitary business, meaning they are interdependent enough to share value through common management, operations, or resources.¹⁵ Every entity in the group is included even without independent Texas nexus. Combined reporting prevents businesses from splitting operations across related entities to shrink their Texas footprint. If you control several related businesses, treat this as an area to sort out with a tax professional before filing.

1
Texas Comptroller of Public Accounts. Franchise Tax Rates, Thresholds and Deduction Limits
2
Texas Comptroller of Public Accounts. Guidelines to Texas Tax Exemptions
3
State of Texas. Texas Tax Code Chapter 171
4
Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions – Passive Entities
5
State of Texas. Texas Tax Code TAX 171.0003
6
State of Texas. Texas Tax Code TAX 171.101 – Determination of Taxable Margin
7
State of Texas. Texas Tax Code 171.002 – Rates; Computation of Tax
8
State of Texas. Texas Tax Code 171.1016 – E-Z Computation and Rate
9
Texas Comptroller of Public Accounts. Franchise Tax Overview
10
Texas Comptroller of Public Accounts. 2025 Franchise Tax Report Information and Instructions
11
Texas Comptroller of Public Accounts. Getting Started with Webfile
12
Texas Comptroller of Public Accounts. Penalties for Past Due Taxes
13
Texas Comptroller of Public Accounts. Franchise Tax
14
Texas Comptroller of Public Accounts. Franchise Tax Notices and Resolving Problems
15
Cornell Law Institute. 34 Texas Administrative Code 3.590 – Margin: Combined Reporting