Texas Franchise Tax: Who Pays, How It’s Calculated, and Deadlines

The Texas franchise tax is the state’s main tax on business activity, and it reaches almost every formally organized business that operates in Texas. For the 2026 report year, entities with annualized total revenue of $2.65 million or less owe no tax, though most still have to file an annual report to stay in good standing.¹ Above that threshold, the tax is calculated on the business’s margin at either 0.75% or 0.375%, depending on what the business does. Falling out of compliance can cost an entity its right to operate in the state and expose its officers and directors to personal liability for company debts.

Which Businesses Owe It

The tax applies to virtually every formal business structure. Corporations, LLCs, limited partnerships, limited liability partnerships, business trusts, professional associations, joint ventures, holding companies, and banking corporations are all taxable entities under Texas Tax Code Section 171.0002.² If you created a legal structure that limits your personal liability, it almost certainly owes this tax.

One trap catches new LLC owners often. A single-member LLC that files as a sole proprietorship for federal income tax purposes is still a taxable entity for Texas franchise tax. The LLC structure itself triggers the obligation, no matter how the IRS treats it.³ The obligation also doesn’t depend on profitability. An entity that lost money still has to file.

Which Businesses Don’t

A handful of structures fall outside the tax:

Sole proprietorships that are not organized as LLCs.⁴
General partnerships where every partner is a natural person and the partnership has not registered as a limited liability partnership.⁴
Passive entities that qualify under Tax Code Section 171.0003.
Certain trusts and special entities, including grantor trusts where all grantors and beneficiaries are natural persons, estates of natural persons, escrows, real estate investment trusts (with conditions), and qualified retirement plan trusts.²

Partnerships and trusts (other than business trusts) can qualify as passive entities if at least 90% of their federal gross income comes from passive sources and no more than 10% comes from an active trade or business.⁵ Qualifying passive income includes dividends, interest, capital gains from selling real property or securities, and royalties or bonuses from mineral properties. Rental income does not count, which trips up a lot of real estate partnerships that assume they qualify. Passive entities owe no tax but must still file either the EZ Computation Report or the Long Form Report to demonstrate they meet the requirements.

Out-of-State Businesses

The tax is not limited to entities formed in Texas. Any taxable entity “doing business” in the state is subject to it, even if it was organized elsewhere. Maintaining an office, employing staff, storing inventory, or having sales representatives in Texas all establish the kind of connection the Comptroller looks for.⁶ Simply registering with the Texas Secretary of State subjects an entity to the tax, even before it generates any Texas revenue.

Affiliated businesses under common ownership that operate as a single economic unit file a combined franchise tax report rather than separate returns, and the no-tax-due threshold applies to the group’s total revenue as a whole rather than to each member.⁷

How the Tax Is Calculated

Total revenue starts with specific line items from the entity’s federal income tax return, with adjustments for items like bad debts, foreign dividends, and distributive income from other pass-through entities.⁸

For the 2026 report year, an entity with annualized total revenue of $2.65 million or less owes no tax.¹ This threshold rose from $2.47 million, which applied to the 2024 and 2025 report years. Being below the threshold does not remove the filing obligation; the Public Information Report or Ownership Information Report still has to go in.

Once revenue exceeds the threshold, the entity calculates its taxable margin using whichever of four methods produces the lowest number:

70% of total revenue, the simplest option with no itemized deductions.
Total revenue minus cost of goods sold, best for entities with high direct production or procurement costs.
Total revenue minus compensation, which favors payroll-heavy businesses. The per-person deduction is capped at $480,000 for the 2026 report year.⁹
Total revenue minus $1 million, a flat deduction available to any entity.⁴

The right method depends on the business. A staffing company with modest product costs will often land on the compensation deduction; a retailer buying and reselling goods will usually do better subtracting cost of goods sold. Running all four calculations before filing is worth the time.

Businesses primarily engaged in retail or wholesale trade pay 0.375% of taxable margin. All others pay 0.75%.¹⁰ Both rates apply to the 2026 and 2027 report years.¹

The EZ Computation Alternative

Entities with total revenue of $20 million or less can skip the margin methods entirely and use the EZ Computation, which multiplies total revenue by 0.331%.¹ The tradeoff is simplicity for potentially higher tax: because the EZ rate applies to total revenue rather than margin, businesses with substantial deductible costs may pay more than they would under one of the standard methods. It works best for low-overhead businesses whose margin would sit close to total revenue anyway.

Filing Deadlines and Required Reports

The annual franchise tax report is due May 15. When the date falls on a weekend or holiday, the deadline moves to the next business day.¹ Reports go through the Comptroller’s Webfile system, accessible through the eSystems portal.¹¹

Every taxable entity also files one of two supplemental reports each year. Corporations, LLCs, limited partnerships, professional associations, and financial institutions file Form 05-102, the Public Information Report. All other taxable entity types file Form 05-167, the Ownership Information Report.¹² Both require names and addresses of officers, directors, managers, or owners, along with the registered agent and office address. Entities below the no-tax-due threshold still file the applicable report.

Extensions

An entity that needs more time can extend to November 15 by paying at least 90% of the current year’s tax or 100% of the prior year’s reported tax by the original May 15 due date.¹³ Entities required to pay by electronic funds transfer get a two-step extension: an initial deadline of August 15 and a second extension to November 15. First-year filers cannot use the 100% prior-year payment option because they have no prior return to reference.

Mandatory Electronic Payment

Entities that paid $10,000 or more in franchise tax during the preceding state fiscal year (September 1 through August 31) must make all payments electronically. Those that paid $500,000 or more must use the TEXNET system specifically.¹⁴ Failing to pay electronically when required triggers a separate 5% penalty on each noncompliant filing period. Entities under the $10,000 threshold can pay by electronic check or credit card through Webfile.

What Happens If You Miss the Deadline

Late payments carry escalating penalties. Paying within 30 days of the due date adds 5%. After 30 days, the penalty rises to 10%. If the entity still hasn’t paid after receiving a formal notice of tax due from the Comptroller, another 10% is added, bringing the total to 20% of the tax owed.¹⁵ Each late report also incurs a flat $50 penalty, even when no tax is owed.

Forfeiture and Personal Liability

The real teeth of the franchise tax are in the forfeiture provisions. If an entity fails to file or pay, the Comptroller sends a notice of pending forfeiture and gives the entity at least 45 days to cure the deficiency. If nothing is done within that window, the entity loses its right to transact business in Texas. Two consequences catch owners off guard: the entity can no longer sue or defend itself in a Texas court, and each officer and director becomes personally liable for the entity’s debts.¹⁶ Personal liability alone makes forfeiture one of the most expensive mistakes a business owner can make in Texas.

Reinstatement

Getting an entity back in good standing requires working with both the Comptroller and the Secretary of State, in that order.¹⁷ The entity has to file all missing franchise tax returns and Public Information or Ownership Information Reports, then pay every outstanding amount of tax, penalty, and interest. Next, it submits Form 05-391 (Tax Clearance Letter Request for Reinstatement) to the Comptroller by mail or through Webfile. Once all obligations are satisfied, the Comptroller issues a tax clearance letter. The entity then files reinstatement forms with the Secretary of State through SOSDirect or SOSUpload and pays the Secretary of State filing fee, which is $75 for most entities.¹⁸

Depending on how many years of reports are delinquent, penalties, interest, and fees can pile up quickly. An entity that discovers a forfeiture should address it right away, because every contract signed, lawsuit filed, or debt incurred while forfeited operates under the shadow of those personal liability provisions.

1
Texas Comptroller of Public Accounts. Franchise Tax
2
State of Texas. Texas Tax Code 171.0002 – Definition of Taxable Entity
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Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions – Taxable Entities
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Texas Comptroller of Public Accounts. Franchise Tax Overview
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State of Texas. Texas Tax Code 171.0003
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Texas Comptroller of Public Accounts. Engaged in Business
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Texas Comptroller of Public Accounts. Franchise Tax Frequently Asked Questions – Combined Reporting
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State of Texas. Texas Tax Code 171.1011 – Determination of Total Revenue From Entire Business
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Texas Comptroller of Public Accounts. Franchise Tax Rates, Thresholds and Deduction Limits
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Texas Public Law. Texas Tax Code 171.002 – Rates; Computation of Tax
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Texas Comptroller of Public Accounts. File and Pay
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Texas Comptroller of Public Accounts. Texas Franchise Tax Public Information Report and Ownership Information Report
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Texas Comptroller of Public Accounts. Franchise Tax Extensions of Time to File
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Texas Comptroller of Public Accounts. TEXNET and Electronic Payment of Taxes and Fees
15
Texas Comptroller of Public Accounts. Penalties for Past Due Taxes
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Texas Comptroller of Public Accounts. Franchise Tax Account Status
17
Texas Comptroller of Public Accounts. Reinstating or Terminating a Business
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Texas Secretary of State. Form 801 Instructions – Application for Reinstatement