Texas Franchise Tax Basics

Texas charges a franchise tax on most businesses that operate in the state, but the amount you owe depends on your revenue and business structure. The tax is not a flat fee—it scales based on how much your business earned in the previous year. Unlike income tax, which Texas does not have, the franchise tax applies to the business itself, not to individual owners' personal income.

The state calculates your franchise tax using one of two methods: either a percentage of your revenue (called taxable margin) or a fixed amount based on your total revenue, whichever results in a lower tax. This means two businesses with identical revenue might pay different amounts depending on their profit margins and business type.

Key Takeaways

  • Texas franchise tax rates range from 0.375% to 0.75% of taxable margin, depending on your business structure and the method you choose to calculate it.
  • Businesses with less than $1.23 million in annual revenue are exempt from franchise tax and do not have to file a return.
  • You calculate taxable margin by subtracting specific deductions (like cost of goods sold or compensation paid) from your total revenue.
  • The tax is due by May 15 each year, and you file through the Texas Comptroller of Public Accounts, not the IRS.
  • Certain business types, including nonprofits, government entities, and some professional services, are fully or partially exempt.

Revenue Thresholds and Who Pays

If your business brought in less than $1.23 million in total revenue during the previous calendar year, you do not owe franchise tax and do not have to file a return with the Texas Comptroller. This threshold is adjusted annually for inflation, so the exact cutoff changes each year. Check the Texas Comptroller website for the current year's threshold before assuming you are exempt.

Once you cross that threshold, you must file a franchise tax report even if you owe zero tax after deductions. Filing late or not filing at all can result in penalties and interest charges, so meeting the May 15 important date matters regardless of whether you expect to owe money.

How Tax Rates Work: The Two Calculation Methods

Texas gives you two ways to calculate your franchise tax, and you pay whichever method produces the lower amount. The first method uses a standard taxable margin of 4.5% of your revenue, taxed at 0.375%. The second method uses a gross margin (your actual profit margin) taxed at 0.75%. Most businesses use the standard method because it is simpler and often cheaper, but some high-profit businesses save money using the gross margin method.

Here is a concrete example: if your business had $2 million in revenue and $500,000 in profit, the standard method would charge you tax on $90,000 (4.5% of $2 million), resulting in $337.50 in tax. The gross margin method would charge you tax on $500,000 (your actual profit), resulting in $3,750 in tax. You would pay the standard method amount. The Texas Comptroller's website includes a calculator that shows both methods for your specific numbers.

Deductions That Lower Your Taxable Margin

You can subtract certain business expenses from your revenue before calculating tax, which lowers the amount you owe. The most common deductions are cost of goods sold (the direct cost of materials or inventory), compensation paid to employees, and certain taxes you have already paid. If you operate multiple businesses or have multiple locations, you may be able to combine them on a single return, which can change your deduction may be able to access.

Deductions vary by business structure. A retailer can deduct inventory costs; a service business cannot. A partnership can deduct partner compensation; a sole proprietor cannot deduct their own salary. The Texas Comptroller publishes detailed guidance for each business type, and many accountants specialize in maximizing these deductions legally. Claiming deductions you are not may have access to to can trigger an audit and penalties, so verify your deductions against the official rules before filing.

Businesses That Are Exempt or Partially Exempt

Certain business types do not owe franchise tax at all. These include nonprofits, government agencies, religious organizations, and some professional services like law practices and medical practices (though this exemption has limits and changed in recent years—verify your profession's current status). Sole proprietors and partnerships with no employees may also may have access to for exemptions under specific conditions.

Other businesses owe reduced tax or can claim credits. For example, if you are a new business in your first year of operation, you may owe no tax. If you reinvest profits back into the business, you might claim a credit. The Texas Comptroller maintains a full list of exemptions and credits on their website, organized by business type. If you think your business qualifies for an exemption, file the appropriate form with your return to claim it.

Filing important date and Where to Pay

Franchise tax returns are due to the Texas Comptroller of Public Accounts by May 15 each year, covering the previous calendar year. You file online through the Comptroller's website using their e-file system; paper returns are also accepted but take longer to process. You can pay by electronic funds withdrawal, credit card, or check. If you miss the May 15 important date, penalties begin accruing when ready—typically 5% of the tax owed per month, up to 25%.

If you operate in multiple states, you still file only with Texas for your Texas operations. Federal income tax and Texas franchise tax are separate filings; you do not pay one to avoid the other. Many accountants handle both filings together, but they are submitted to different agencies on different schedules.

Frequently Asked Questions

Do I have to pay franchise tax if I made no profit?

You still owe franchise tax if your revenue exceeded the threshold, even if you operated at a loss. The tax is based on revenue, not profit, though you can use the gross margin method if your actual profit margin is lower than the standard 4.5%. If you had a loss, you may owe zero tax after deductions, but you still must file the return by May 15.

What happens if I file late or do not file at all?

Late filing penalties start at 5% of your tax owed and increase 5% per month up to 25% total. If you do not file, the Comptroller can assess tax based on their estimate of your revenue, which is often higher than what you actually owed. Interest also accrues on unpaid tax. Contact the Comptroller when ready if you missed the important date to discuss payment options.

Can I deduct my own salary as a sole proprietor?

No. Sole proprietors cannot deduct their own compensation. However, you can deduct wages paid to employees, cost of goods sold, and other legitimate business expenses. If you operate as an S-corporation or LLC taxed as a corporation, the rules change—consult a tax professional about your specific structure.

Is franchise tax the same as income tax?

No. Texas has no state income tax on individuals or businesses. Franchise tax is a separate tax on the business itself, based on revenue. You may still owe federal income tax to the IRS, but that is a different filing and agency.

What if my business is in another state but I have customers in Texas?

If you have a physical presence in Texas (an office, warehouse, or employees), you likely owe franchise tax on your Texas revenue. If you only ship products to Texas customers with no physical location there, you generally do not owe Texas franchise tax. The rules depend on your specific situation, so contact the Texas Comptroller's office or a tax professional to confirm.