What Is the Texas Franchise Tax? Who Pays, Rates, and Filing

The Texas franchise tax is a yearly privilege tax that business entities pay for the right to operate in the state, and because Texas has no personal or corporate income tax, it is the state’s main tax on businesses. For reports due in 2026, entities with annualized total revenue of $2.65 million or less owe nothing, though most still have to file paperwork with the Texas Comptroller of Public Accounts.¹

Which Businesses Owe the Tax

Texas Tax Code Section 171.0002 defines “taxable entity” broadly. It covers corporations, LLCs, limited partnerships, limited liability partnerships, banking corporations, savings and loan associations, business trusts, professional associations, joint ventures, joint stock companies, holding companies, and essentially any other legal entity doing business in the state.² If your business carries any form of liability protection, or is anything other than a bare sole proprietorship or a qualifying general partnership, it almost certainly falls under the franchise tax.

Who Is Exempt

Several categories sit outside the definition of “taxable entity” entirely:²

Sole proprietorships are fully exempt, but only true sole proprietorships. Forming a single-member LLC makes you a taxable entity even though the IRS treats it as a disregarded entity.
General partnerships owned entirely by natural persons are exempt, provided no partner is a corporation or LLC and the partnership has not registered as an LLP under any state’s laws.
Passive entities, meaning a partnership or trust that earns at least 90% of its federal gross income from passive sources like dividends, interest, capital gains on securities, or mineral royalties, and no more than 10% from an active trade or business. An entity with zero federal gross income does not qualify.³
Certain trusts, including grantor trusts where all grantors and beneficiaries are natural persons or charitable organizations, estates of natural persons, and REITs that meet specified ownership tests.
Nonprofits exempt under Tax Code Subchapter B, including most 501(c)(3) organizations.

The No-Tax-Due Threshold

Among entities that do fall under the tax, many still owe nothing. For the 2026 report year, if your annualized total revenue is $2.65 million or less, your franchise tax liability is zero.¹ The Comptroller adjusts the threshold periodically, so verify the current figure each year. Falling below the threshold does not remove your obligation to file an annual information report.

When Out-of-State Businesses Owe

A business formed outside Texas still owes if it has nexus with the state, established either through physical presence or economic activity.

Physical presence covers an office, warehouse, retail location, or inventory storage in Texas, along with employees, contractors, or agents working in the state, performing contracts with local labor, doing warranty work, staging events, or managing operations from within Texas.⁴ The list is broad and catches activities many out-of-state businesses don’t realize count, such as storing consigned goods or sending materials to a Texas manufacturer for processing.

Economic nexus is the newer trigger. Since January 2020, a business with no physical footprint in Texas still has franchise tax nexus if it earns $500,000 or more in annual gross receipts from business conducted in the state.⁵ That catches online sellers and service providers who generate significant revenue from Texas customers without ever setting foot in the state.

How the Tax Is Calculated

The tax is based on a business’s “margin,” a modified version of total revenue. Total revenue starts with the amounts you report for federal income tax purposes, with certain statutory exclusions such as taxes collected and remitted on behalf of a government body. You pick whichever of four methods produces the lowest margin:⁶

70% of total revenue.
Total revenue minus cost of goods sold (qualifying costs of acquiring and producing tangible personal property or real property).
Total revenue minus compensation, which covers W-2 wages, cash compensation to officers, directors, owners, partners, and employees, plus benefits like health care, retirement contributions, and workers’ compensation. For reports due in 2026, the deduction is capped at $480,000 per person.⁷
Total revenue minus a flat $1 million.

Once you have your margin, it is apportioned to Texas based on the share of your total sales that come from within the state.

The Rates

Three rate tiers apply to the apportioned margin. The general rate is 0.75%. Businesses primarily engaged in retail or wholesale trade, as classified under Divisions F and G of the 1987 Standard Industrial Classification Manual, pay 0.375%; some businesses that don’t think of themselves as retail qualify, including automotive repair shops and heavy equipment rental companies with the right SIC codes.⁸ Entities with $20 million or less in total revenue may elect the EZ computation, which applies 0.331% directly to Texas-apportioned total revenue and skips the margin calculation.⁶ EZ is simpler, but because you can’t subtract cost of goods sold or compensation, it costs some businesses more than the standard methods.

Affiliated entities under more than 50% common ownership that operate as a unitary business don’t each file separately; they file a single combined report, and every member is jointly and severally liable for the group’s tax, penalties, and interest.⁹

When and What You File

Every taxable entity files an annual franchise tax report by May 15. If that date lands on a weekend or holiday, the deadline shifts to the next business day.⁶

You can extend the filing deadline to November 15 by submitting an extension request, but you have to pay either 100% of last year’s tax or 90% of the current year’s tax by May 15 for the extension to be valid. Entities required to pay by electronic funds transfer (those that paid $10,000 or more in franchise tax during the prior state fiscal year) get a first extension to August 15 and can request a second to November 15.¹⁰

Entities that owe tax file a franchise tax report using either the EZ computation or the long form. Entities at or below the $2.65 million no-tax-due threshold skip the tax report but still have to file an annual information report.¹ The type of information report depends on structure. Corporations, LLCs, limited partnerships, professional associations, and financial institutions file a Public Information Report (Form 05-102), which puts officer and director details on the Comptroller’s public website. Other taxable entities, such as general partnerships with entity partners, file an Ownership Information Report (Form 05-167), where ownership details stay confidential.¹¹ The Comptroller’s Webfile system is the preferred filing method.

What Happens If You Don’t File or Pay

Late filing triggers a flat $50 penalty per report, even on a zero return.⁶ Late payment is worse: 5% of the tax if you pay within 30 days of the deadline, 10% if you’re more than 30 days late, and another 10% on top if you still haven’t paid after receiving a formal Notice of Tax Due. That brings the total to 20% of the tax owed.¹²

The dollar penalties are not the real risk. The Comptroller can forfeit your entity’s right to transact business in Texas, and once forfeited, your business loses the right to sue or defend itself in any Texas court.² You can’t enforce contracts, collect debts through litigation, or seek affirmative relief until you fix your standing. Reinstatement requires filing all past-due reports, paying what you owe plus penalties and interest, and then filing a reinstatement application (Form 801) with the Texas Secretary of State along with a tax clearance letter from the Comptroller.¹³ Many owners find out they’ve been forfeited only when they try to renew a license, close a real estate deal, or respond to a lawsuit, so checking your standing with the Comptroller once a year is time well spent.

1
Texas Comptroller. Texas Franchise Tax Report Forms for 2026
2
State of Texas. Tax Code Chapter 171 – Franchise Tax
3
Cornell Law School. 34 Tex. Admin. Code 3.582 – Margin: Passive Entities
4
Texas Comptroller. Franchise Activities
5
Texas Comptroller. Remote Sellers
6
Texas Comptroller. Franchise Tax Overview
7
Texas Comptroller. 2026 Franchise Tax Instructions Form 05-915
8
Texas Comptroller. Franchise Tax Rates, Thresholds and Deduction Limits
9
Cornell Law School. 34 Tex. Admin. Code 3.590 – Margin: Combined Reporting
10
Texas Comptroller. Franchise Tax Extensions of Time to File
11
Texas Comptroller. Texas Franchise Tax Public Information Report and Ownership Information Report
12
Texas Comptroller. Penalties for Past Due Taxes
13
Texas Secretary of State. Terminations and Reinstatements FAQs