Texas Franchise Tax
A privilege tax imposed by Texas on most taxable entities formed in or doing business in the state. Calculated as a percentage of taxable margin under Tex. Tax Code Ch. 171, the lowest of four computation methods. The 2026 no-tax-due threshold is $2.65 million in annualized total revenue. Standard rate 0.75% (0.375% for retail/wholesale); EZ Computation rate 0.331%. Reports due May 15.
The Texas Franchise Tax is a privilege tax imposed by the State of Texas on most taxable entities formed in or doing business in the state. Despite its name, the tax has nothing to do with franchising, it is a margin-based tax administered by the Texas Comptroller of Public Accounts. Texas does not impose a state corporate or personal income tax; the franchise tax is the principal entity-level state tax replacing the income tax in those structures. Annual reports are due May 15.
Who pays
Subject entities include corporations (including S-corporations), LLCs (including single-member LLCs), limited partnerships and limited liability partnerships, professional associations, business trusts, and certain financial institutions. Out-of-state entities with nexus in Texas, including economic nexus over $500,000 in Texas gross receipts, are also subject. NOT subject: sole proprietorships (other than single-member LLCs); general partnerships owned entirely by natural persons; certain passive entities; entities exempt under Subchapter B of Ch. 171; qualified new veteran-owned businesses for the first five years.
Margin calculation, four methods, lowest wins
Taxable margin under § 171.101 is the lowest of: (1) 70% of total revenue; (2) total revenue minus cost of goods sold; (3) total revenue minus compensation (capped at $480,000 per person for 2026 reports); or (4) total revenue minus $1 million. The chosen method is then apportioned to Texas using single-factor gross-receipts apportionment under § 171.106 (Texas gross receipts ÷ gross receipts everywhere).
Rates and thresholds (2026)
Standard rate: 0.75% of apportioned taxable margin. Retail or wholesale entities: 0.375% (must derive 50%+ of revenue from retail or wholesale activities). EZ Computation rate: 0.331% (available to entities with annualized total revenue ≤ $20 million; foregoes deductions and most credits). 2026 no-tax-due threshold: $2.65 million in annualized total revenue (up from $2.47M in 2024-2025). Entities at or below the threshold owe no franchise tax but must still file an information report (PIR or OIR).
Reporting obligations
Entities above the threshold file the Long Form (Forms 05-158-A and 05-158-B) or the EZ Computation (Form 05-169). All entities (except passive entities and qualified veteran-owned businesses) must annually file either a Public Information Report (Form 05-102, corporations, LLCs, LPs, professional associations, financial institutions) or an Ownership Information Report (Form 05-167, other entities). Entities at or below the no-tax-due threshold no longer file a No Tax Due Report (effective for 2024+ reports) but must file the information report. Reports due May 15; six-month extension available with Form 05-164 plus required payment of 90% of current-year or 100% of prior-year tax.
Forfeiture and reinstatement
Failure to file or pay franchise tax results in forfeiture of the entity's right to transact business in Texas under § 171.251. Forfeited entities lose access to Texas courts as plaintiffs and may face personal liability for officers and directors who incurred debts during the forfeiture period. Reinstatement requires filing all delinquent reports, paying all tax due plus penalties and interest, and filing a tax clearance request, a process that frequently takes 4-8 weeks even after all filings are current.
For most Texas SMBs operating below the $2.65M threshold, the franchise tax obligation is administrative rather than substantive, file the information report, owe nothing. The pitfall is treating filing as optional. Forfeiture for non-filing is automatic and creates significant downstream complications. Best practice: calendar May 15 annually, run all four margin computations even when below threshold to confirm classification, and never let an entity drift into delinquent status. Annual filing fees are minimal compared to reinstatement costs and litigation-standing problems caused by forfeiture.