Texas Franchise Tax Guide for Small Businesses (2026)

Texas has no state income tax, but it isn't tax-free for businesses. Nearly every corporation, LLC, and partnership formed or operating in Texas owes a separate entity-level tax called the franchise tax — and a surprising number of business owners don't realize it applies to them until they get a notice. This guide covers who owes it, who's exempt, how it's calculated, when it's due, and what happens if you miss the deadline.

Table of Contents

1. What Is the Texas Franchise Tax?
2. Who Has to Pay It
3. Who's Exempt
4. The No-Tax-Due Threshold
5. How the Tax Is Calculated
6. Filing Deadlines and Extensions
7. What Happens If You Miss the Deadline
8. FAQ

What Is the Texas Franchise Tax?

The Texas franchise tax is a privilege tax — the state charges it for the right to operate as a legal entity in Texas, not as a tax on your income. That distinction matters more than it sounds. The tax is calculated on "taxable margin," a figure derived from gross revenue, not net profit. A business can lose money on its federal return and still owe Texas franchise tax. A business can also turn a solid profit and owe nothing, if its revenue falls at or below the no-tax-due threshold.

Because Texas has no personal income tax, a lot of business owners assume the state doesn't tax business activity at all. It does — just at the entity level, through a completely separate filing from anything you do federally.

Who Has to Pay It

Franchise tax applies to entities formed or organized in Texas, and to out-of-state entities doing business in Texas, including:

• Corporations
• Limited liability companies (LLCs), including single-member LLCs
• Limited partnerships and limited liability partnerships
• Professional associations and professional corporations
• Business trusts, joint ventures, and holding companies
• Banking corporations and savings and loan associations

Single-member LLCs are a common point of confusion. Federally, a single-member LLC typically reports on the owner's personal return and doesn't file its own federal income tax return. Texas doesn't follow that treatment — the franchise tax report is a separate, entity-level filing regardless of how the business is taxed federally.

Out-of-state businesses aren't automatically off the hook either. An entity that's formed elsewhere but does business in Texas — has employees here, owns property here, or otherwise establishes nexus — generally has to register and file, even without a Texas-based office.

Entity structure also shapes how much of this exposure applies. The choice between an LLC, a corporation, and a partnership affects franchise tax treatment differently, and it's a decision worth revisiting through business entity formation planning as a business grows rather than assuming the original structure still fits.

Who's Exempt

The exemption list is narrower than most owners expect. Entities that don't file or pay franchise tax at all include:

• Sole proprietorships (but not single-member LLCs)
• General partnerships owned entirely by natural persons (not limited liability partnerships)
• Certain unincorporated passive entities
• Certain grantor trusts, estates of natural persons, and escrows
• Real estate mortgage investment conduits and certain qualifying real estate investment trusts
• Nonprofit self-insurance trusts and certain other statutorily defined trusts
• Unincorporated political committees

A separate category of for-profit entities can apply for exemption rather than being automatically excluded, including certain nonprofit-adjacent corporations organized under specific IRC sections, insurance companies, open-end investment companies, businesses solely engaged in manufacturing or installing solar energy devices, recycling operations, entities in Texas only to attend a trade show, farmers' cooperative societies, and housing finance corporations.

If your business is an LLC, corporation, or limited partnership and none of the above applies, assume you're a taxable entity until a CPA confirms otherwise.

The No-Tax-Due Threshold

Being a taxable entity doesn't automatically mean you owe money. Texas uses a no-tax-due threshold: for the 2026 and 2027 report years, that threshold is $2,650,000 in annualized total revenue — up from $2,470,000 for 2024 and 2025. Businesses at or below that figure owe no franchise tax for the period.

Here's the part that catches people off guard: falling below the threshold doesn't eliminate your filing obligation. Since reports due on or after January 1, 2024, the standalone No Tax Due Report was eliminated — businesses below the threshold no longer file a tax computation at all. But nearly every taxable entity still has to file a Public Information Report or Ownership Information Report annually, confirming ownership and entity details, regardless of whether any tax is owed. Skipping that filing, even at $0 due, can result in penalties and put the entity's right to operate in Texas at risk.

How the Tax Is Calculated

For businesses above the no-tax-due threshold, taxable margin is calculated using the lowest of four methods:

1. 70% of total revenue
2. Total revenue minus cost of goods sold
3. Total revenue minus compensation (subject to a per-employee compensation deduction cap, set at $480,000 for the 2026-2027 period)
4. Total revenue minus $1 million

Whichever produces the lowest margin is the one you use — running all four before filing is standard practice, since guessing wrong means overpaying.

The standard tax rate is 0.75% of taxable margin for most entities, and 0.375% for businesses primarily engaged in retail or wholesale trade. Entities with $20 million or less in annualized total revenue can elect the EZ Computation method instead, which applies a 0.331% rate directly to total revenue and skips the margin calculations entirely — simpler, but not always cheaper. A retail business with meaningful cost of goods sold, for example, can end up owing more under the EZ method than under the standard calculation, because the EZ method doesn't account for COGS at all.

Filing Deadlines and Extensions

The franchise tax report is due May 15 each year. Businesses that need more time can request an extension using Form 05-164, which is not automatic — it has to be filed on or before the original due date.

For most businesses, paying at least 90% of the tax actually owed by May 15 extends the filing deadline to November 15. Businesses required to pay by Electronic Funds Transfer — generally those that paid $10,000 or more in franchise tax the prior year — follow a different, two-step extension process, and combined groups have additional filing requirements. Because the mechanics vary by payment method and entity structure, it's worth confirming the exact process with a CPA rather than assuming the standard extension rules apply to every entity type.

One important note: an extension buys time to file, not time to pay. If the required percentage isn't paid by May 15, penalties apply to the unpaid balance regardless of whether the extension request itself was filed correctly.

What Happens If You Miss the Deadline

Missing the May 15 deadline — or the extended deadline, if one was properly requested — triggers a flat $50 penalty on the report itself, even if the tax due is $0. On top of that, a 5% penalty applies to any unpaid tax within the first 30 days past due, increasing to 10% beyond 30 days, with interest accruing on the unpaid balance.

The consequences go beyond the dollar amount. Continued non-filing can lead to forfeiture of the entity's right to transact business in Texas — which strips away the liability protection an LLC or corporation exists to provide in the first place. For a business owner who formed an LLC specifically to separate personal and business liability, that's a real cost, not just an administrative inconvenience.

If your business has already received a forfeiture notice or a Comptroller letter about a missed filing, that's a fixable problem — our team handles notices and unresolved filing issues directly, including for businesses inheriting a backlog from a previous preparer.

FAQ

Do I owe Texas franchise tax if my business isn't profitable?

Possibly. Franchise tax is calculated on taxable margin, derived from gross revenue, not net income. A business can post a loss on its federal return and still owe Texas franchise tax if its revenue is above the no-tax-due threshold.

My revenue is under the threshold — do I still need to file anything?

Yes, in most cases. Even at $0 owed, most Texas entities still have to file a Public Information Report or Ownership Information Report annually. The standalone No Tax Due Report no longer exists, but the information filing requirement remains.

Does a single-member LLC have to file Texas franchise tax separately from my federal return?

Yes. Federally, a single-member LLC typically reports through the owner's personal return. Texas franchise tax is a separate, entity-level filing that applies regardless of how the business is taxed federally.

What's the difference between the standard method and the EZ Computation?

The standard method calculates taxable margin using the lowest of four methods (70% of revenue, revenue minus COGS, revenue minus compensation, or revenue minus $1 million) at a 0.75% or 0.375% rate. The EZ Computation applies a flat 0.331% rate directly to total revenue for entities with $20 million or less in revenue, skipping the margin calculations — but it doesn't account for cost of goods sold, which can make it more expensive for businesses with significant COGS.

Can I get more time to file if I'm not ready by May 15?

Yes, by filing Form 05-164 on or before the original due date and paying the required percentage of tax owed. This typically extends the deadline to November 15, though the exact mechanics depend on payment method and entity structure.

Talk to a CPA Before the Numbers Surprise You

Franchise tax rules shift from year to year — thresholds, deduction caps, and rates are all subject to periodic adjustment by the Texas Comptroller. Gurian CPA Firm handles franchise tax planning, filing, and compliance as part of a full-service accounting relationship, so this isn't something you're reconstructing alone every May. That holds whether your business operates in Dallas, Houston, or both.

Talk to our tax services team to see where your business stands and what's due this year.