Texas Franchise Tax: What It Is and Who Pays It

A franchise tax in Texas is an annual state tax on businesses that operate in the state, whether they are incorporated in Texas or elsewhere. It is not a tax on the right to incorporate — it is a tax on the privilege of doing business in Texas. The state calls it the "franchise tax," but it functions as a business income tax that applies to most for-profit entities.

The Texas Comptroller of Public Accounts administers the franchise tax. Unlike federal income tax, which is based on net profit, the Texas franchise tax is calculated on taxable earned surplus — roughly speaking, your revenue minus certain deductions. The rate is either 0.375% or 0.75% of taxable earned surplus, depending on your business structure and the deductions you claim.

Not every business pays it. Sole proprietorships and partnerships do not owe franchise tax. Corporations, limited liability companies (LLCs), professional associations, and certain other entities do. If your business is structured as an S corporation for federal purposes, you may still owe Texas franchise tax as an LLC or corporation under state law.

Key Takeaways

  • Texas franchise tax applies to corporations, LLCs, professional associations, and similar entities, but not to sole proprietorships or partnerships.
  • The tax is calculated on taxable earned surplus (roughly revenue minus deductions), not on net profit, at a rate of 0.375% or 0.75%.
  • Most businesses with less than $1.23 million in revenue in a year do not owe franchise tax because they fall below the threshold.
  • You file and pay franchise tax through the Texas Comptroller's online system, and the important date is typically May 15 each year.
  • Failure to file or pay results in penalties, interest, and potential loss of your right to do business in Texas.

Who Has to Pay Franchise Tax in Texas

Your business structure determines whether you owe franchise tax. Corporations incorporated in Texas or doing business in Texas must pay it. Limited liability companies (LLCs) must pay it. Professional associations, business trusts, and cooperative associations must pay it. If you operate as a sole proprietor or general partnership, you do not owe franchise tax at the state level.

There is also a revenue threshold. Businesses with less than $1.23 million in total revenue during the calendar year do not owe franchise tax. This threshold is adjusted annually for inflation. If your business crossed $1.23 million in revenue in 2024, you would owe franchise tax for that year. If you stayed below it, you do not file.

The threshold applies to your entire business revenue, not just profit. A business that grossed $1.5 million but had very thin margins still owes franchise tax. Conversely, a business that grossed $1.2 million owes nothing, even if it was highly profitable.

How the Franchise Tax Is Calculated

The Texas franchise tax is not calculated on your net profit. Instead, it is based on taxable earned surplus, which the state defines as your total revenue minus certain deductions. The two main deductions are cost of goods sold (COGS) and compensation paid to employees.

Once you calculate taxable earned surplus, you explore the tax rate. The rate is 0.375% for most businesses. However, if you claim the deduction for cost of goods sold, your rate drops to 0.375%. If you do not claim COGS, your rate is 0.75%. This means businesses with significant product costs (retailers, manufacturers) pay a lower rate than service businesses.

Here is a simplified example: A consulting firm with $2 million in revenue and $500,000 in employee compensation would have taxable earned surplus of $1.5 million. At the 0.75% rate (no COGS), the franchise tax would be $11,250. A retail business with $2 million in revenue, $500,000 in COGS, and $300,000 in employee compensation would have taxable earned surplus of $1.2 million. At the 0.375% rate, the franchise tax would be $4,500.

Filing and Payment important date

You file your franchise tax return through the Texas Comptroller's online system, called the Texas Online Services (TOS) portal. You do not mail a paper form. The important date to file and pay is typically May 15 of the year following the tax year. For example, for the 2024 tax year, the important date is May 15, 2025.

If you cannot file by the important date, you can request a filing extension through the TOS portal. Extensions are usually granted for 60 days, moving the important date to mid-July. However, if you owe tax, interest begins accruing on May 16, even if you have an extension. Paying early or on time avoids interest charges.

The Texas Comptroller accepts payment online through the TOS portal, by check, or by electronic funds withdrawal. If you pay by check, mail it to the address listed on the Comptroller's website. Online payment is processed when ready and is the fastest way to may support your payment is recorded on time.

Penalties and Consequences of Not Filing

If you do not file your franchise tax return by the important date, the Texas Comptroller assesses a penalty. The penalty is 5% of the tax due for each month (or part of a month) that the return is late, up to a maximum of 25%. If you owe $10,000 in franchise tax and file three months late, you owe an additional $1,500 in penalties.

Interest also accrues on any unpaid tax. The interest rate is set quarterly by the Comptroller and is currently around 8% per year. Interest compounds daily. A $10,000 tax bill that sits unpaid for six months will accrue roughly $400 in interest on top of the original amount.

Beyond financial penalties, failing to file or pay franchise tax can result in loss of your right to do business in Texas. The Comptroller can revoke your business registration, which means you cannot legally operate in the state. Customers and vendors may also discover the revocation when they check your business status, damaging your reputation.

Exemptions and Special Cases

Certain businesses are exempt from franchise tax entirely. Nonprofits, charitable organizations, and religious institutions do not pay it. Businesses that are wholly owned by the state or federal government do not pay it. Certain agricultural cooperatives and credit unions have exemptions as well.

If your business qualifies for an exemption, you still must file a franchise tax return with the Comptroller — you straightforward report zero tax due and claim the exemption. Filing even when you owe nothing keeps your business in good standing and prevents the Comptroller from assessing penalties for non-filing.

Some businesses may also may have access to for a reduced rate or deduction based on their industry or structure. For example, businesses that are part of a controlled group may be able to combine their revenue for threshold purposes. If you think your business might may have access to for a special rate or exemption, contact the Texas Comptroller's office or consult a tax professional before filing.

Frequently Asked Questions

Do I owe franchise tax if my business lost money last year?

If your business had revenue above the $1.23 million threshold, you owe franchise tax even if you had a net loss. The franchise tax is based on revenue and deductions, not on profit. However, if your revenue was below the threshold, you do not owe franchise tax regardless of whether you made or lost money.

What if I just started my business partway through the year?

You calculate your revenue for the entire calendar year, including the months before you started. If you started in June and had $800,000 in revenue for June through December, you do not owe franchise tax because you stayed below the threshold. If you had $1.5 million, you owe it even though you only operated for seven months.

Is franchise tax the same as federal income tax?

No. Federal income tax is based on net profit and is owed to the Internal Revenue Service. Texas franchise tax is based on revenue and deductions and is owed to the Texas Comptroller. You may owe both. Franchise tax is not deductible on your federal return.

Can I file my franchise tax return myself, or do I need a tax professional?

You can file it yourself through the Texas Comptroller's online portal if you understand how to calculate taxable earned surplus and explore the rate. Many small business owners use a tax professional or accountant to may support the calculation is correct and to avoid penalties. The cost of professional help is often less than the cost of filing incorrectly.

What happens if the Comptroller audits my franchise tax return?

The Comptroller may request documentation of your revenue, deductions, and business structure. You should keep records of your income and expenses for at least four years. If the audit finds you underpaid, you owe the difference plus interest and penalties. If it finds you overpaid, you may receive a refund.