The Texas margin tax is the state’s franchise tax on business entities, calculated as a percentage of an entity’s taxable margin rather than its net income. For the 2026 and 2027 reporting years, retailers and wholesalers pay 0.375 percent of margin, all other taxable entities pay 0.75 percent, and any entity with total revenue at or below $2,650,000 owes nothing.1Texas Comptroller of Public Accounts. Franchise Tax The catch is that “margin” can be figured four different ways, and picking the wrong one can cost thousands.
Who Owes the Tax
The tax reaches most business structures that shield their owners from personal liability. Corporations, LLCs, limited partnerships, professional associations, business trusts, joint ventures, and banking institutions are all taxable entities under Chapter 171 of the Tax Code.2State of Texas. Texas Tax Code 171.0002 – Definition of Taxable Entity
Several structures fall outside the tax:
- Sole proprietorships that have not organized in a way that limits liability.
- General partnerships whose direct owners are all natural persons, so long as the partnership is not registered as an LLP.
- Passive entities: partnerships and non-business trusts that get at least 90 percent of federal gross income from dividends, interest, capital gains, and similar passive sources.
- Grantor trusts with only natural-person grantors and beneficiaries, estates of natural persons, qualified retirement trusts, and REMICs.
Passive status is tested every year. A partnership that qualified last year but dips below the 90 percent threshold this year becomes fully taxable for the period.3Texas Comptroller of Public Accounts. Passive Entities – Franchise Tax Frequently Asked Questions
Out-of-state businesses get pulled in through nexus — a physical presence such as an office, employees, or inventory in Texas, or substantial economic activity directed at Texas customers.
Start With Total Revenue
Every calculation begins with total revenue, and total revenue is built directly from specific lines of the federal income tax return using the line references that existed on 2006 IRS forms.4Texas Comptroller of Public Accounts. Total Revenue – Franchise Tax Frequently Asked Questions A corporation on Form 1120 starts with gross receipts and adds the other income items on lines 4 through 10. A partnership on Form 1065 pulls from both the face of the return and Schedule K.5State of Texas. Texas Tax Code 171.1011
From that starting figure, the entity subtracts items such as bad debts already expensed federally, foreign royalties and dividends, and net distributive income from other entities treated as partnerships or S corporations federally. Reconcile this number to the federal return line by line. A mistake here flows through every step that follows.
The Four Ways to Calculate Taxable Margin
Once total revenue is set, the statute gives you a choice, and you pay tax on whichever result is smallest:6State of Texas. Texas Tax Code 171.101 – Determination of Taxable Margin
- 70 percent of total revenue.
- Total revenue minus $1 million.
- Total revenue minus cost of goods sold.
- Total revenue minus compensation.
Revenue Times 70 Percent
Multiply total revenue by 0.70 and stop. No expense itemization. This tends to help low-overhead operations — think consulting firms or licensors — whose actual deductions under the other methods would come in below 30 percent of revenue.
Revenue Minus Cost of Goods Sold
This one favors businesses that produce, manufacture, or acquire tangible goods for resale. Allowable costs include direct materials, direct production labor, and handling costs up to the point the goods are first displayed for sale. Construction subcontractor payments count, as do oil and gas extraction costs.7Texas Comptroller of Public Accounts. Cost of Goods Sold – Franchise Tax Frequently Asked Questions Distribution expenses, selling costs incurred after goods are available for sale (a restaurant’s waitstaff labor, for example), and federal bonus depreciation do not qualify. Pure service businesses usually have little to deduct here.
Revenue Minus Compensation
Compensation covers Medicare wages from each employee’s W-2, net distributive income paid to natural-person owners of pass-through entities, stock awards deducted federally, and the cost of benefits the entity provides such as health insurance, retirement contributions, and workers’ compensation.8State of Texas. Texas Tax Code 171.1013 For 2026 and 2027, no one person’s wages and cash compensation can exceed $480,000 in the calculation, regardless of what was actually paid.1Texas Comptroller of Public Accounts. Franchise Tax Staffing firms, professional-services companies, and restaurants typically land here.
Revenue Minus $1 Million
This works as a floor. If cost of goods sold or compensation would come in below $1 million, the statute automatically substitutes $1 million as the deduction. Smaller entities with modest expenses often use this by default.
EZ Computation
Entities with annualized total revenue of $20 million or less can skip the margin formulas and pay a flat 0.331 percent of apportioned Texas revenue.1Texas Comptroller of Public Accounts. Franchise Tax No cost or compensation deduction is involved. It’s simpler but sometimes more expensive than a standard formula would have been. Run the numbers both ways before committing.
Rates and the No-Tax-Due Threshold
Once you have taxable margin, apply the rate matched to your primary business activity:
- Retail or wholesale trade: 0.375 percent.
- All other taxable entities: 0.75 percent.
Both rates are set by statute.9State of Texas. Texas Tax Code 171.002 – Rates; Computation of Tax The lower rate applies when the majority of the entity’s total revenue comes from retail or wholesale activity.
For the 2026 and 2027 reports, total revenue at or below $2,650,000 means no tax is owed.1Texas Comptroller of Public Accounts. Franchise Tax Any entity whose computed tax comes in below $1,000 also owes nothing. Falling below the threshold does not end the filing obligation — the information report is still required.
Combined Reporting for Affiliated Groups
When one entity owns more than 50 percent of another and they operate as a single economic enterprise, they file a combined report rather than separate returns.10Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions: Combined Reporting The unitary test looks at shared management, related lines of business, and integrated production.
A few rules regularly catch filers off guard:
- The $2,650,000 no-tax-due threshold applies to the group as a whole, not to each member.
- Members without Texas nexus are still included for total revenue, margin, and gross receipts everywhere, though they are excluded from Texas receipts in apportionment.
- Ownership held by a spouse is attributed to the other spouse for the controlling-interest test. No other family attribution applies.
- If any single member is required to pay by electronic funds transfer, the whole group must pay electronically.
Filing Deadlines and Extensions
The annual report is due May 15 for most entities.11Texas Comptroller of Public Accounts. Due Dates for Taxes, Fees and Information Reports Webfile payments must be in by 11:59 p.m. Central Time on the due date; paper checks must be postmarked by that date.
You can request an extension through Webfile or by mailing Form 05-164 on or before May 15. To keep the extension valid, pay at least 90 percent of the tax that will be due on the current report or 100 percent of the prior year’s reported tax.12Texas Comptroller of Public Accounts. Franchise Tax Extensions of Time to File Meeting that threshold moves the filing deadline to November 15.
Entities that paid $10,000 or more in franchise tax during the prior state fiscal year must pay by EFT and follow a different extension schedule. Their first extension moves the deadline to August 15, and a second extension requested by August 15 pushes it to November 15. Entities that paid $500,000 or more use TEXNET with tax type code 13080 for extension payments.12Texas Comptroller of Public Accounts. Franchise Tax Extensions of Time to File
Required Forms and How to File
The main report is Form 05-158, which captures total revenue, the chosen deduction, and the final margin.13Texas Comptroller of Public Accounts. Long Form Report EZ Computation filers use a shorter version of that form. On top of the tax report, most entities file one of two information reports:
- Form 05-102, Public Information Report, used by corporations and LLCs to update officers, directors, and managers.
- Form 05-167, Ownership Information Report, used by partnerships and other entities whose structure doesn’t fit the PIR format.
For reports originally due in 2024 and after, entities at or below the no-tax-due threshold no longer file the tax report, but the applicable information report is still required every year.14Texas Comptroller of Public Accounts. Franchise Tax Overview Skipping the information report triggers the same delinquency process as skipping the tax report, so a zero-tax year is not a no-filing year.
Most filers use the Comptroller’s Webfile portal, which walks you through each schedule, calculates the tax, and accepts payment by electronic check or credit card.15Texas Comptroller of Public Accounts. About Webfile It issues a confirmation with a tracking number as soon as you submit. Paper filing by mail is still available, but Webfile flags common input errors in real time.
Penalties, Interest, and Forfeiture
Late payments carry stacked penalties. A payment 1 to 30 days late triggers a 5 percent penalty on the unpaid tax. After 30 days, the penalty rises to 10 percent. If the balance remains unpaid after the Comptroller issues a formal notice of tax due, another 10 percent is added, bringing the total to 20 percent.16Texas Comptroller of Public Accounts. Penalties for Past Due Taxes A separate $50 penalty applies to each report filed late, even when no tax is owed.
Interest starts on the 61st day after the due date. For calendar year 2026, the rate is 7.75 percent annually, based on prime plus one percent.17Texas Comptroller of Public Accounts. Interest Owed and Earned The rate resets at the start of each calendar year and can move with prime.
The worst outcome is forfeiture. If an entity fails to file or pay within 45 days after the Comptroller mails a forfeiture notice, the state revokes its right to transact business in Texas.18State of Texas. Texas Tax Code 171.251 – Forfeiture of Corporate Privileges A forfeited entity cannot sue in Texas courts to enforce contracts, and its officers and directors can be personally liable for debts incurred while privileges are suspended.
Reinstatement means filing every delinquent report, paying all back taxes with penalties and interest, requesting a tax clearance letter on Form 05-391, and then filing reinstatement paperwork with the Secretary of State along with that office’s own fees.19Texas Comptroller of Public Accounts. Reinstating or Terminating a Business The entity remains barred from doing business in Texas until every step clears. Staying current on both the tax report and the information report, even in years when no tax is owed, is far easier than climbing back out.