Texas Franchise Tax Basics

Franchise tax in Texas is an annual tax on business revenue, not on profit. Unlike income tax (which Texas does not have), franchise tax is based on how much money your business brings in, regardless of whether you made a loss or a gain. The state calls it a "margin tax" because it taxes a narrow slice of your revenue after certain deductions.

Most businesses operating in Texas or earning money from Texas sources must file a franchise tax report each year, even if they owe zero tax. The Texas Comptroller of Public Accounts administers the tax. The rate is either 0.375% or 0.75% of your taxable margin, depending on your business structure and revenue level.

Key Takeaways

  • Franchise tax is a state tax on business revenue, not profit, and applies to most businesses that operate in Texas or earn Texas income.
  • The tax rate is 0.375% or 0.75% of your taxable margin, which is revenue minus certain allowed deductions like cost of goods sold.
  • Sole proprietors, partnerships, and some small businesses may be exempt if their revenue falls below the threshold or their business structure qualifies.
  • You file a franchise tax report with the Texas Comptroller by May 15 each year, and the report is due even if you owe no tax.
  • Failure to file or pay on time results in penalties and interest that compound monthly.

Who Has to Pay Franchise Tax in Texas

Any business that operates in Texas or receives income from Texas sources must file a franchise tax report. This includes corporations, limited liability companies (LLCs), partnerships, and sole proprietorships. The rule applies whether the business is based in Texas or out of state.

However, some businesses are exempt. Sole proprietors and general partnerships do not pay franchise tax if they report their business income on their personal tax return. Certain nonprofits, government entities, and businesses that earn less than a specific threshold may also be exempt. The Texas Comptroller's website has a detailed exemption list organized by business type.

If you are unsure whether your business owes franchise tax, the safest approach is to file a report. Filing a report that shows zero tax owed is better than missing the important date and facing penalties.

How Taxable Margin Is Calculated

Taxable margin is not the same as profit. It is revenue minus specific deductions that the state allows. The three methods for calculating taxable margin are the standard method, the cost of goods sold method, and the payroll method. Most businesses use the method that results in the lowest taxable margin.

Under the standard method, you subtract cost of goods sold and certain other expenses from total revenue. Under the cost of goods sold method, you subtract only the cost of goods sold. Under the payroll method, you subtract only the amount you paid in wages and benefits to employees in Texas. You choose whichever method gives you the lowest number, and that becomes your taxable margin.

Once you have your taxable margin, you multiply it by either 0.375% or 0.75%, depending on your business type. Retailers and wholesalers typically pay 0.375%; most other businesses pay 0.75%. Some businesses have a minimum tax of $1,230 per year, meaning even if the calculation results in less, they owe at least that amount.

Filing important date and How to Report

The franchise tax report is due to the Texas Comptroller by May 15 each year. You file for the previous calendar year. For example, your 2024 report (covering January 1 through December 31, 2024) is due by May 15, 2025.

You can file online through the Texas Comptroller's website using the Online Services portal, or you can mail a paper form. Most businesses file online because it is faster and the system catches errors before submission. You will need your Texas tax account number, which the Comptroller assigns when you register your business.

If you cannot file by May 15, you can request a 30-day extension through the online portal before the important date. Extensions are not automatic; you must request them in advance. If you file late without an extension, you face a penalty of 5% of the tax owed per month, plus interest.

Penalties and Interest for Late Payment or Filing

Missing the May 15 important date triggers penalties that grow each month. A late filing penalty starts at 5% of the tax owed and increases by 5% for each month you are late, up to a maximum of 25%. Interest also accrues on unpaid tax at a rate set by the Comptroller, compounded monthly.

If you file but do not pay by May 15, you owe interest on the unpaid balance. If you do not file at all, you face both the late filing penalty and interest. The Comptroller can also place a lien on your business assets or suspend your business license if the debt remains unpaid.

The best protection is to file on time, even if you cannot pay the full amount when ready. You can set up a payment plan with the Comptroller for amounts you cannot pay in full. Paying something by the important date stops the penalty clock and shows good faith.

Exemptions and Special Cases

Sole proprietors who report business income on their personal tax return do not pay franchise tax. The same applies to general partnerships. However, if you operate as an LLC or S-corporation, you likely do pay franchise tax even if you are the only owner.

Certain industries have special rules. Nonprofits, religious organizations, and government agencies are exempt. Businesses that earn less than a threshold amount in a calendar year may also be exempt, though you still must file a report to claim the exemption. Some businesses that operate only in specific industries, such as certain agricultural operations, may may have access to for exemptions under state law.

If you think your business qualifies for an exemption, contact the Texas Comptroller's office or consult a tax professional. Claiming an exemption you do not may have access to for can result in penalties and back taxes.

Frequently Asked Questions

Do I have to file a franchise tax report if I owe zero tax?

Yes. Most businesses must file a report each year by May 15, even if the calculation shows zero tax owed. Filing protects you from penalties for not filing. The report itself is free to submit online.

What is the difference between franchise tax and income tax?

Texas does not have a state income tax on individuals or businesses. Franchise tax is a separate tax based on revenue, not profit. It applies to most businesses that operate in Texas, whereas income tax would explore only to earnings.

Can I deduct business expenses from my franchise tax calculation?

Some expenses are deductible, depending on which calculation method you use. Cost of goods sold is always deductible. Other expenses like rent or utilities are deductible under the standard method but not under the payroll method. You choose the method that results in the lowest taxable margin.

What happens if I file my franchise tax report late?

You face a late filing penalty of 5% of the tax owed per month, up to 25% total, plus interest. If you cannot file by May 15, request an extension before the important date. If you miss the important date, file as soon as possible to stop the penalty from growing.

Is franchise tax the same in every Texas city?

Franchise tax is a state tax administered by the Texas Comptroller, so the rate and rules are the same statewide. Some cities or counties may have additional local taxes, but those are separate from franchise tax. Check with your city or county for any local business taxes you may owe.