Texas Franchise Tax: Rates, Deadlines & Filing Guide

“Texas doesn’t have a state income tax.”

I hear this from new business owners at least once a week. They moved from California or New York, started a business in Houston, and assume they’re off the hook for state-level taxes entirely.

Not quite. Texas doesn’t tax your personal income. But if you operate a business entity — LLC, corporation, partnership, or professional association — the Texas Comptroller wants to hear from you every year. It’s called the franchise tax, and ignoring it has consequences that sneak up on business owners who don’t see it coming.

What the Franchise Tax Actually Is

The Texas franchise tax is a privilege tax. You’re paying for the privilege of doing business in Texas as a legal entity. It’s based on your business revenue, not your profit.

That distinction matters. A business that grosses $2 million but barely breaks even still owes franchise tax on the revenue. This surprises business owners who are used to the federal model where you’re taxed on net income.

The tax rate depends on your industry:

Retail and wholesale businesses: 0.375% of taxable margin

All other businesses: 0.75% of taxable margin

“Taxable margin” is where the calculation gets interesting. You don’t pay the tax on your total revenue. You pick the most favorable of four calculation methods:

1. Total revenue minus cost of goods sold (COGS)
2. Total revenue minus compensation paid to employees
3. Total revenue times 70%
4. Total revenue minus $1 million (the standard deduction)

Most Houston small businesses with employees find that method 2 (revenue minus compensation) gives the best result. Businesses with high material costs — construction companies, restaurants, wholesalers — often benefit from method 1 (revenue minus COGS).

The $1 million deduction (method 4) makes the franchise tax irrelevant for most very small businesses. If your total revenue is under $1 million, your taxable margin under this method is zero. If it’s $1.5 million, your taxable margin is $500,000, and the tax at 0.75% is $3,750.

Who Owes It

Every taxable entity doing business in Texas. This includes:

• Limited Liability Companies (LLCs) — single-member and multi-member
• Corporations (C-corps and S-corps)
• Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs)
• Professional Associations (PAs) and Professional Corporations (PCs)
• Business trusts
• Joint ventures organized as any of the above

Sole proprietorships and general partnerships owned entirely by natural persons do not owe franchise tax. If you’re a sole proprietor operating under a DBA in Houston, you’re not subject to the franchise tax. But the moment you form an LLC — even a single-member LLC — you’re in.

This catches people. A freelancer operating as “John Smith” doesn’t owe franchise tax. The same freelancer who formed “John Smith Consulting LLC” does. The business is identical. The legal entity changes the tax obligation.

Out-of-state entities doing business in Texas also owe it. If a California corporation has an office, employees, or significant business activity in Texas, the Comptroller expects a franchise tax report.

The No-Tax-Due Threshold

Here’s the number that matters most for small Houston businesses: $2.47 million (for report years 2024 and beyond — the Comptroller adjusts this periodically).

If your annualized total revenue is at or below $2.47 million, you owe zero franchise tax. You still have to file a report — the No Tax Due Report — but the check amount is $0.

Roughly 90% of the Houston small businesses I work with fall under this threshold. They file the no-tax-due report, check a box, and move on. But they still have to file. That’s the part people miss.

Filing Deadlines

Annual report due date: May 15.

The franchise tax report covers the fiscal year that ended in the previous calendar year. So the report due May 15, 2026, covers your fiscal year ending in 2025. If your fiscal year ends December 31, 2025, you’re reporting on that full calendar year.

Extension: October 15. Texas grants an automatic 6-month extension to October 15. But — and this is critical — if you owe tax, you must pay the estimated amount by May 15 to avoid penalties. The extension is for the report, not the payment.

Initial report. New entities formed or registered in Texas must file an initial report. The due date depends on your formation date, but it’s generally due the following May 15 covering the accounting period from formation through the end of that calendar year.

Final report. If you’re dissolving, terminating, or withdrawing your entity from Texas, you must file a final report. This is the one business owners forget. You can’t just stop filing. The Comptroller will assume you’re still operating and keep assessing penalties.

The “EZ Computation”

Businesses with total revenue between $2.47 million and $20 million can use a simplified calculation called the EZ Computation. Instead of calculating taxable margin under one of the four methods, you pay 0.331% of total revenue.

For some businesses, this is a better deal than the standard calculation. For others, it’s worse. The math depends on your cost structure.

A restaurant in Montrose grossing $4 million with $1.8 million in COGS would owe:

• Standard method (COGS): ($4M - $1.8M) x 0.375% = $8,250
• EZ Computation: $4M x 0.331% = $13,240

In this case, the standard calculation saves $5,000. But a consulting firm with $4 million in revenue and minimal COGS might prefer the EZ Computation because their taxable margin under the standard method would be higher.

Run both calculations. Pick the lower number.

Common Mistakes I See

Mistake 1: Not Filing at All

“I’m under the threshold, so I don’t need to file.”

Wrong. Every taxable entity in Texas must file a franchise tax report, even if the tax owed is zero. Failure to file — even a no-tax-due report — results in penalties and can lead to the Comptroller forfeiting your entity’s right to do business in Texas.

Forfeiture means your LLC or corporation loses its legal standing. You can’t enforce contracts. You can’t file lawsuits. Your personal liability protection disappears. I’ve seen Houston business owners discover their LLC was forfeited when they tried to sue a client for non-payment. The court told them they didn’t have standing because their entity didn’t legally exist.

Reinstating a forfeited entity requires filing all delinquent reports, paying all penalties and interest, and filing reinstatement paperwork. The cost is always more than the cost of just filing the report on time.

Mistake 2: Forgetting the Final Report

You dissolved your LLC last year. You filed the dissolution paperwork with the Secretary of State. But you didn’t file a final franchise tax report with the Comptroller.

The Comptroller and the Secretary of State are different offices. They don’t automatically communicate dissolution status in real time. The Comptroller will keep expecting annual reports from your dissolved entity until you file that final report. Penalties accrue.

Mistake 3: Using the Wrong Revenue Figure

Total revenue for franchise tax purposes isn’t always the same number on your federal return. Texas has specific add-backs and subtractions — and some of these overlap with tax write-offs for small business on the federal side. The most common:

• Certain flow-through income from subsidiary entities
• Specific exclusions for passive income in certain structures
• Adjustments for entities that are part of a combined group

If your business structure involves multiple entities, the combined group rules get complicated fast. A holding company that owns two operating LLCs in Houston might need to file a combined report treating all three entities as one.

Mistake 4: Misclassifying Your Industry

The difference between 0.375% (retail/wholesale) and 0.75% (everything else) is significant. A business doing $5 million in revenue with $2 million taxable margin pays $7,500 at the retail rate or $15,000 at the standard rate.

The Comptroller’s definition of “retail” and “wholesale” is specific. You must be primarily engaged in selling tangible personal property at retail or wholesale. A restaurant qualifies as retail. A consulting firm doesn’t. A company that sells both products and services has to determine which activity generates the majority of revenue.

Getting this classification wrong — in either direction — creates problems. Classify too favorably and the Comptroller assesses additional tax plus penalties. Classify too conservatively and you overpay.

Penalties for Non-Compliance

Late filing penalty: 5% of the tax due for the first month (or fraction), plus 5% for each additional month, up to 25%.

Failure-to-file penalty: If you don’t file at all, the Comptroller estimates your tax and adds penalties. The estimated amount is almost always higher than what you’d actually owe.

Interest: 1% above the prime rate, compounded monthly.

Entity forfeiture: The Comptroller can revoke your entity’s right to do business in Texas. This is the nuclear option, but they use it. The Comptroller’s office reported forfeiting over 100,000 entities in recent years for failure to file franchise tax reports.

Tax warrant: The Comptroller can file a tax warrant (similar to a lien) against your assets.

How to File

Online through WebFile. The Texas Comptroller’s WebFile system handles franchise tax reports electronically. You’ll need your 11-digit taxpayer ID number and WebFile number. First-time filers can set up access through the Comptroller’s website.

Through your accountant. Most accounting firms that handle Texas business clients file franchise tax reports as part of their annual compliance services.

The reports:

• No Tax Due Report (Form 05-163) — for entities with revenue at or below the no-tax-due threshold
• EZ Computation Report (Form 05-169) — for entities using the simplified calculation
• Long Form (Form 05-158-A and 05-158-B) — for entities using the standard margin calculation
• Public Information Report (Form 05-102) or Ownership Information Report (Form 05-167) — filed with every franchise tax report, listing officers/directors/partners

The Public Information Report is required regardless of tax owed. It updates the Comptroller’s records on who runs your entity. Skipping it is a separate violation.

The Houston Business Reality

Most Houston small businesses with under $2.47 million in revenue have a straightforward franchise tax obligation: file the no-tax-due report by May 15 and move on. It takes 20 minutes.

For businesses above the threshold, the calculation requires some planning. Choosing the right margin deduction method (COGS vs. compensation vs. 70% vs. standard deduction) can save thousands of dollars. Understanding which business expense categories fall under COGS versus compensation is worth running through with your accountant before filing.

If you’re behind on franchise tax reports, get current. The Comptroller’s forfeiture process runs on autopilot and the penalties compound. We file franchise tax reports for Houston businesses as part of our tax preparation services and can get delinquent entities back into compliance.

Talk to us about your Texas franchise tax filing.