What Is Texas Franchise Tax? Who Pays, Filing, and Penalties

The Texas franchise tax is a privilege tax that corporations, LLCs, limited partnerships, and most other business entities pay for the right to operate in the state.¹ For the 2026 report year, businesses with annualized total revenue of $2,650,000 or less owe nothing, though many still have to file an information report. Above that threshold, you compute a “taxable margin” and apply a rate of 0.75 percent, 0.375 percent for retailers and wholesalers, or 0.331 percent if you use the simplified EZ Computation.²

Who Has to Pay

Texas imposes the franchise tax on every taxable entity that does business in the state or is chartered or organized here.¹ That covers corporations, LLCs, limited partnerships, limited liability partnerships, business trusts, professional associations, and banks and savings and loans operating in Texas.³

Several common structures sit outside the tax entirely. Sole proprietorships are not taxable entities. General partnerships owned entirely by natural persons (individuals, not other business entities) are not taxable either. Qualifying nonprofits and other exempt organizations are also excluded.

Two narrower exemptions are worth flagging. Partnerships and trusts (other than business trusts) can qualify as “passive entities” and owe no tax if at least 90 percent of their federal gross income comes from passive sources such as dividends, interest, capital gains from real property or securities, and mineral royalties, and no more than 10 percent comes from an active trade or business.⁴ Passive entities still have to file a report, but only sign it; no financial details are required.⁵ Separately, a qualifying new veteran-owned business formed in Texas and owned entirely by honorably discharged veterans is exempt from the tax and from filing any report for its first five years.⁶

When Out-of-State Businesses Owe

Having your business based somewhere other than Texas doesn’t automatically keep you out of the tax. You owe it if you have nexus with the state. Physical presence does it: an office, a warehouse, or employees working in Texas. Even without physical presence, your business has economic nexus once it earns $500,000 or more in annual gross receipts from business done in Texas.⁷

Multi-state businesses don’t pay on their whole margin. Texas apportions using a single factor: the ratio of your Texas gross receipts to your total gross receipts everywhere.⁸ If 40 percent of your receipts come from Texas, you apply the rate to 40 percent of your taxable margin.

How the Tax Is Calculated

The franchise tax runs on your “taxable margin,” and you choose whichever of four calculation methods produces the lowest result:³

Total revenue minus cost of goods sold. This tends to help businesses with real production or inventory costs; COGS covers direct costs of producing goods or acquiring inventory for resale.
Total revenue minus compensation. Better for service businesses with heavy payroll. Compensation includes wages, cash payments to officers and employees, and benefits like health care and retirement contributions. For the 2026 report year, the deduction is capped at $480,000 per person.⁹
Total revenue times 70 percent. A straightforward option when neither COGS nor compensation gives you much to deduct.
Total revenue minus $1 million. Often the best pick for smaller businesses sitting just above the no-tax-due threshold.

Once you have the margin, you apply a rate. Retailers and wholesalers pay 0.375 percent. Everyone else pays 0.75 percent.² To qualify for the lower retail or wholesale rate, more than half of your total revenue must come from retail or wholesale activities, and less than 50 percent of that retail or wholesale revenue can come from products you manufactured yourself. Utilities, including telecommunications and electricity providers, do not qualify for the lower rate.

The No-Tax-Due Threshold and the EZ Shortcut

Most Texas businesses owe nothing. For the 2026 and 2027 report years, the no-tax-due threshold is $2,650,000 in annualized total revenue.⁹ Fall under that and your tax bill is zero. Separately, if your computed tax works out to less than $1,000, you also owe nothing regardless of revenue.

Owing no tax doesn’t fully let you off the hook. You generally still have to file a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167). Starting with the 2024 report year, however, the separate No Tax Due Report is no longer required.¹⁰

Businesses with $20 million or less in annualized total revenue can skip the four-method calculation and use the EZ Computation instead: multiply total revenue by 0.331 percent.² You give up the COGS and compensation deductions in exchange for a much simpler filing. For businesses without big deductible expenses, EZ can actually come out lower, so it’s worth running both numbers before you file.

Forms, Deadlines, and Extensions

The annual franchise tax report is due May 15. If the 15th lands on a weekend or holiday, the deadline moves to the next business day.²

The two tax report forms are the Long Form (Forms 05-158-A and 05-158-B), used by entities calculating their margin under the standard methods, and the EZ Computation Report (Form 05-169) for the 0.331 percent option. On top of the tax report, most entities file one of two information reports: Form 05-102 (Public Information Report) for corporations, LLCs, and most other entities, which discloses officers, directors, managers, and the registered agent; or Form 05-167 (Ownership Information Report) for partnerships and certain other entities, which discloses ownership structure.¹¹

Most filers submit through the Comptroller’s Webfile system and get a confirmation number as proof of timely filing. Skipping the Public Information Report is not a minor oversight: failure to file it can trigger forfeiture of your right to do business in Texas even if the tax report is filed and all taxes are paid.¹²

If you can’t make May 15, you can request an extension, but you have to send sufficient payment with the request by that date. For most entities, the extension pushes the deadline to November 15. You file it online through Webfile or submit Form 05-164 (Texas Franchise Tax Extension Request) with payment.¹³ To qualify, your payment has to equal at least 90 percent of the tax that will be due with the current year’s report, or 100 percent of the tax you reported on last year’s report if that prior report was filed on time. Underpay and the extension can be treated as invalid, with penalties and interest applied to the full balance.

Larger businesses that must pay by electronic funds transfer, meaning those that paid $10,000 or more in the previous state fiscal year, follow a different schedule. Their first extension only reaches August 15, with a second extension available to November 15 if an additional payment is made by August 15.

Penalties, Interest, and Forfeiture

Filing a franchise tax report late draws a flat $50 penalty, whether or not any tax is actually due.¹² If you owe tax and pay late, percentage penalties stack on top:¹⁴

1 to 30 days late: 5 percent of the unpaid tax.
More than 30 days late: 10 percent.
After a Notice of Tax Due: an additional 10 percent, bringing the total to 20 percent.

Interest starts accruing on the 61st day after the due date. For 2026, the interest rate is 7.75 percent annually.¹⁵

The worst outcome is forfeiture. If an entity doesn’t file all required reports and pay what’s owed within 45 days of a Notice of Intent to Forfeit, the Comptroller can revoke its authority to do business in Texas, and officers and directors may become personally liable for debts the entity incurs after forfeiture.¹² Getting back in good standing means filing every past-due report, paying all outstanding tax, penalties, and interest, requesting a Tax Clearance Letter from the Comptroller using Form 05-391, and then submitting that letter to the Secretary of State with reinstatement paperwork and fees.¹⁶ Until each step is finished, the entity cannot legally do business in Texas.

1
State of Texas. Texas Tax Code Section 171-001 – Tax Imposed
2
Texas Comptroller of Public Accounts. Franchise Tax
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Texas Comptroller of Public Accounts. Franchise Tax Overview
4
Legal Information Institute. 34 Texas Admin Code 3-582 – Margin: Passive Entities
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Texas Comptroller of Public Accounts. Long Form Report Franchise Tax
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Texas Comptroller of Public Accounts. New Veteran-Owned Businesses and Texas Franchise Tax
7
Texas Comptroller of Public Accounts. Remote Sellers
8
Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions: Apportionment
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Texas Comptroller of Public Accounts. Franchise Tax – Tax Rates, Thresholds and Deduction Limits
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Texas Comptroller of Public Accounts. No Tax Due Reporting for Report Year 2024 and Later
11
Texas Comptroller of Public Accounts. Texas Franchise Tax Report Forms for 2025
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Texas Comptroller of Public Accounts. 2025 Texas Franchise Tax Report Information and Instructions
13
Texas Comptroller of Public Accounts. Franchise Tax Extensions of Time to File
14
Texas Comptroller of Public Accounts. Penalties for Past Due Taxes
15
Texas Comptroller of Public Accounts. Interest Owed and Earned
16
Texas Comptroller of Public Accounts. Reinstating or Terminating a Business