Texas Franchise Tax Basics

Texas franchise tax is a state tax on business revenue, not on profit. It applies to most businesses that operate in Texas, whether they are incorporated, partnerships, sole proprietorships, or other structures. Unlike income tax — which Texas does not have — franchise tax is based on how much money your business brings in, and you pay it to the state comptroller's office every two years.

The tax rate depends on your business structure and total revenue. Most businesses pay either 0.375 percent or 0.75 percent of revenue, though some industries have different rates. There is a minimum tax of $1.50 per year, and a maximum tax of $1.23 million per year. If your business revenue falls below a certain threshold, you may not owe franchise tax at all.

You file franchise tax returns on a biennial (two-year) cycle, not annually. Your filing important date depends on your business structure and when your accounting period ends, but most businesses file between January 1 and May 15 in odd-numbered years.

Key Takeaways

  • Texas franchise tax is a state tax on business revenue, not profit, and applies to most businesses operating in the state regardless of where they are incorporated.
  • The tax rate is usually 0.375 percent or 0.75 percent of revenue, with a minimum of $1.50 and a maximum of $1.23 million per year.
  • Businesses with revenue below $1.23 million in a two-year period may not owe franchise tax, but you still need to file a report to claim the exemption.
  • You file franchise tax returns every two years, not annually, with important date typically between January 1 and May 15 in odd-numbered years.
  • Certain businesses — including nonprofits, government entities, and some professional services — are exempt from franchise tax entirely.

Who Has to Pay Franchise Tax

Most for-profit businesses that operate in Texas owe franchise tax, even if they are incorporated in another state or country. This includes corporations, partnerships, limited liability companies (LLCs), sole proprietorships, and other business structures. The key trigger is whether your business has a presence in Texas — meaning you have an office, employees, inventory, or customers there.

Some businesses are exempt. Nonprofits, government agencies, and certain professional service firms do not pay franchise tax. Sole proprietors and partnerships where all partners are individuals may also be exempt if they meet specific conditions. Insurance companies, banks, and some other financial institutions pay different state taxes instead of franchise tax.

If you are unsure whether your business owes franchise tax, the Texas Comptroller of Public Accounts website has a questionnaire that walks you through the rules. You can also contact the comptroller's office directly — they have a franchise tax section that answers questions about your specific situation.

How the Tax Rate Works

The standard franchise tax rate is 0.375 percent of revenue for most businesses. However, if your business is structured as a partnership or sole proprietorship and meets certain conditions, you may pay 0.75 percent instead. The difference depends on whether your business is classified as a "taxable entity" under state law.

Your total tax bill cannot be less than $1.50 per year or more than $1.23 million per year, regardless of your revenue. This means a very small business pays the minimum, and a very large business hits the cap. The cap is adjusted annually for inflation, so the maximum amount changes slightly from year to year.

You calculate your tax based on your total revenue for the two-year period, minus certain deductible items. Deductible items include cost of goods sold, federal excise taxes, and some other specific expenses. The comptroller's office provides worksheets to help you calculate what counts as deductible revenue.

Revenue Thresholds and Exemptions

If your business had less than $1.23 million in revenue during a two-year period, you do not owe franchise tax. However, you still need to file a report with the comptroller to claim the exemption — you cannot straightforward skip filing. Filing the report protects you if the comptroller later questions whether you owed tax.

Some businesses are exempt from filing altogether. Nonprofits, government entities, and certain professional service businesses do not file franchise tax reports. If you operate a law firm, medical practice, or accounting firm where all owners are licensed professionals in that field, you may be exempt. Sole proprietors who have no employees and operate from home may also be exempt, depending on their revenue and business type.

The exemption rules are specific and depend on your exact business structure. The Texas Comptroller provides a detailed guide on their website that lists which business types are exempt. If you are on the borderline, it is worth reviewing that guide or calling the comptroller's office to confirm your status before your filing important date.

Filing Your Franchise Tax Return

You file franchise tax returns through the Texas Comptroller's online system, called the Comptroller's Online System (COS). You will need your Texas tax account number, which the comptroller assigns when you register your business. If you do not have one, you can register online through the same system.

Your filing important date depends on your business structure and accounting period. Most businesses file between January 1 and May 15 in odd-numbered years — so you file in 2025 for the 2023–2024 period, then again in 2027 for the 2025–2026 period. If your accounting period does not match the calendar year, your important date may be different. The comptroller's website has a important date calculator that shows your specific due date.

You will need your total revenue for the two-year period, your deductible items, and your business structure information. Keep your accounting records and receipts in case the comptroller audits your return. If you miss the important date, you owe a penalty of 5 percent of the tax due, plus interest.

What Happens If You Do Not File

If you owe franchise tax and do not file, the Texas Comptroller can assess a penalty of 5 percent of the tax due, plus interest that accrues monthly. If you do not file for multiple years, the penalties and interest add up quickly. The comptroller can also revoke your business registration or place a lien on your business assets.

Even if you believe you do not owe franchise tax because your revenue was below the threshold, you should still file a report claiming the exemption. Filing protects you legally and shows the comptroller that you are aware of your filing obligation. If you file late, you still owe the penalty, but filing is better than not filing at all.

If you have not filed in previous years and realize you owe back taxes, contact the comptroller's office. They sometimes offer payment plans or penalty relief if you file voluntarily before they contact you. The longer you wait, the larger your debt becomes.

Franchise Tax Versus Other Texas Business Taxes

Texas has no state income tax on individuals or businesses, which is why franchise tax exists — it is the state's main business tax. However, you still owe federal income tax to the IRS, and you may owe sales tax if you sell goods or taxable services in Texas. Franchise tax is separate from both of those.

Some businesses owe different state taxes instead of franchise tax. Banks and insurance companies pay a franchise tax based on assets or premiums, not revenue. Utilities and telecommunications companies may pay different taxes. If your business falls into one of these categories, the comptroller's office will tell you which tax applies to you.

You may also owe local taxes depending on your city or county. Some cities have a local business tax, and some counties have specific taxes on certain industries. Franchise tax is a state-level tax only and does not replace local taxes — you may owe both.

Frequently Asked Questions

Do I have to pay franchise tax if my business is incorporated in another state?

Yes, if your business operates in Texas, you owe Texas franchise tax regardless of where you are incorporated. Texas taxes any business that has a presence in the state, including out-of-state corporations. You will need to register with the Texas Secretary of State and the Comptroller's office.

What counts as revenue for franchise tax purposes?

Revenue includes all money your business takes in from sales, services, rentals, and other sources. You can subtract cost of goods sold, federal excise taxes, and a few other specific items. The comptroller's worksheets show exactly what is deductible. When in doubt, include the income and let the comptroller's office clarify.

Can I file my franchise tax return early?

Yes, you can file anytime during the filing period, which opens January 1 in odd-numbered years. Filing early does not hurt you and may reduce your stress. You cannot file before January 1 of the filing year, even if you have your numbers ready.

What if my business closed during the two-year period?

You still file a franchise tax return for the period you were in business. You report the revenue you earned while operating and may owe tax on that amount. You should also file a final report with the Texas Secretary of State to formally close your business registration.

Is there a penalty for filing late?

Yes, the penalty is 5 percent of the tax due, plus interest that accrues monthly. If you owe $1,000 in tax and file three months late, you owe the $1,000 plus $50 in penalty plus interest. The longer you wait, the more you owe in penalties and interest combined.