Texas has no state income tax, but it does have a franchise tax—sometimes called a “margin tax.” Here’s the good news: most small Texas LLCs owe $0 in franchise tax. The threshold is high enough that businesses with less than $2.47 million in annual revenue pay nothing. But even if you owe nothing, you still must file an annual report.
This guide explains how the Texas franchise tax works, who pays it, and how to stay compliant.
What Is the Texas Franchise Tax?
The franchise tax is a tax on businesses operating in Texas. Unlike income taxes that tax profits, the franchise tax is based on a business’s “margin”—roughly, revenue minus certain costs.
Key points:
- Applies to LLCs, corporations, and other business entities
- Based on revenue, not profit
- Most small businesses pay nothing due to the threshold
- Filing required annually regardless of tax owed
Who Pays Texas Franchise Tax?
Entities Subject to Franchise Tax
- LLCs (including single-member LLCs)
- Corporations (S-Corps and C-Corps)
- Limited partnerships
- Professional associations
- Business trusts
- Most other taxable entities
Entities Exempt from Franchise Tax
- Sole proprietorships (no formal entity)
- General partnerships owned entirely by individuals
- Certain passive entities
- Nonprofit organizations (with exemptions)
The No Tax Due Threshold
Most small businesses in Texas owe no franchise tax thanks to the revenue threshold.
For 2024:
- No Tax Due: Total revenue under $2,470,000
- This means: If your LLC’s annualized revenue is below this threshold, you owe $0 in franchise tax
What Counts as Revenue?
“Total revenue” includes:
- Gross receipts from sales
- Service income
- Rental income
- Investment income
- Most other business income
“Total revenue” generally does not include:
- Capital contributions from members
- Loans received
- Certain pass-through amounts
Calculating Annualized Revenue
If your LLC hasn’t been in business for a full year, you must annualize revenue:
Formula: (Revenue ÷ Days in Business) × 365 = Annualized Revenue
Example:
- LLC formed July 1, operating for 184 days
- Total revenue: $500,000
- Annualized: ($500,000 ÷ 184) × 365 = $991,848
Even though actual revenue was $500,000, the annualized revenue is $991,848—still under the threshold.
Franchise Tax Rates
If your LLC exceeds the no tax due threshold, here are the rates:
| Calculation Method | Tax Rate |
|---|---|
| Retail/Wholesale | 0.375% of margin |
| Other Businesses | 0.75% of margin |
| EZ Computation | 0.331% of gross receipts |
Calculating Your Margin
“Margin” is your tax base, calculated as total revenue minus one of these deductions (your choice of the method that results in the lowest tax):
- Cost of Goods Sold (COGS): Best for businesses selling physical products
- Compensation: Best for service businesses with high payroll
- 70% of Revenue: Simple calculation, often used as backup
- $1 Million Standard Deduction: Useful for businesses with low costs
EZ Computation
Businesses with total revenue between $2.47 million and $20 million can use the “EZ Computation”:
- Simple calculation: 0.331% × Total Revenue
- No margin calculation needed
- May result in higher or lower tax—calculate both ways
Annual Filing Requirements
What You Must File
All Texas LLCs must file:
- Franchise Tax Report (No Tax Due, EZ Computation, or Long Form)
- Public Information Report (PIR)
Forms by Revenue Level
| Revenue | Forms Required |
|---|---|
| Under $2.47M | Form 05-163 (No Tax Due) + PIR |
| $2.47M – $20M | Form 05-169 (EZ Computation) + PIR |
| Over $20M | Form 05-158 (Long Form) + PIR |
Filing Deadlines
| Report | Due Date |
|---|---|
| Annual Franchise Tax Report | May 15 |
| Public Information Report | May 15 |
If May 15 falls on a weekend or holiday, the deadline moves to the next business day.
First-Year Filing
New LLCs have a modified first-year filing requirement:
- If formed after January 1: First report due May 15 of the following year
- First report covers: Formation date through December 31 of formation year
Example: LLC formed June 15, 2024
- First franchise tax report due: May 15, 2025
- Reporting period: June 15 – December 31, 2024
How to File Your Franchise Tax Report
Online Filing (Recommended)
File through Texas WebFile:
- Go to Texas Comptroller WebFile
- Log in or create account
- Select your entity
- Complete the appropriate form
- File Public Information Report
- Submit (and pay if applicable)
By Mail
Download forms from the Comptroller website and mail to:
Texas Comptroller of Public Accounts
P.O. Box 149348
Austin, TX 78714-9348
E-File Required for Some
LLCs with tax due over $10,000 must file electronically.
The Public Information Report (PIR)
Filed alongside your franchise tax report, the PIR updates Texas on your LLC’s:
- Principal office address
- Registered agent and office
- Officers/directors/managers
- Nature of business
Why it matters:
- Keeps your state record current
- Failure to file can lead to forfeiture
- Public record (accessible online)
What Happens If You Don’t File?
Penalties for Late Filing
| Situation | Penalty |
|---|---|
| Filed late (tax due) | 5% of tax per month (up to 25%) |
| Filed late (no tax due) | $50 |
| Failure to file PIR | Can lead to forfeiture |
Forfeiture
If you don’t file your franchise tax report:
- Notice sent: Texas Comptroller sends notice of delinquency
- Right to transact business forfeited: You lose the right to sue, defend lawsuits, and do business in Texas
- Continued non-compliance: Can lead to involuntary termination
Reinstatement: You can reinstate by filing all past-due reports and paying outstanding taxes, penalties, and interest.
Common Franchise Tax Questions
Do single-member LLCs pay franchise tax?
Yes, single-member LLCs are subject to franchise tax. However, most will owe nothing due to the revenue threshold.
What if I formed my LLC but had no revenue?
You still must file the No Tax Due Report. Zero revenue = no tax, but filing is still required.
Is franchise tax the same as income tax?
No. Texas has no state income tax. The franchise tax is based on margin (a form of revenue), not profit.
Can I deduct franchise tax on federal taxes?
Yes, franchise tax paid is generally deductible as a business expense on your federal return.
What if I missed past filings?
File all delinquent reports as soon as possible. Pay any taxes, penalties, and interest due. Contact the Comptroller if you need help determining what’s owed.
Do out-of-state LLCs pay Texas franchise tax?
If you’re doing business in Texas, you’re subject to Texas franchise tax, even if incorporated elsewhere.
Franchise Tax vs. Other States
| State | Business Tax |
|---|---|
| Texas | Franchise tax (0.75% margin) |
| Florida | 5.5% corporate income tax (LLCs exempt) |
| California | $800 minimum franchise tax + income |
| Delaware | $300 annual flat fee (LLC) |
| Wyoming | $60 annual report fee |
Despite having a franchise tax, Texas’s overall tax burden for LLCs is often lower than states with income taxes or high minimum fees.
Tips to Minimize Franchise Tax
1. Track Your Revenue
Know whether you’re approaching the $2.47 million threshold. Plan accordingly.
2. Choose the Right Deduction Method
If you owe tax, calculate using all four methods (COGS, compensation, 70%, $1M deduction) and use whichever results in the lowest margin.
3. Understand What’s Excludable
Certain revenue may be excludable:
- Flow-through funds
- Certain dividends
- Some real estate transactions
Consult a tax professional for complex situations.
4. File on Time
Avoid penalties by filing before May 15. Set calendar reminders.
5. Consider Entity Structure
For some businesses, restructuring (e.g., using a holding company or different entity type) may reduce franchise tax. This requires professional tax advice.
Franchise Tax Filing Checklist
Before filing, gather:
- [ ] Total revenue for the reporting period
- [ ] Cost of goods sold (if applicable)
- [ ] Total compensation paid
- [ ] Current registered agent information
- [ ] Principal office address
- [ ] Officer/manager/director names
- [ ] SOS file number
- [ ] Taxpayer number (from Comptroller)
Stay Compliant with Your Texas LLC
The Texas franchise tax is manageable for most small businesses—you likely owe nothing. But filing is not optional. Missing your annual report can lead to penalties and even loss of your LLC’s good standing.
IncCraft helps Texas LLCs stay compliant with annual filing reminders and support. When you form your LLC with IncCraft, we make sure you understand your ongoing obligations.
Form your Texas LLC with IncCraft and stay compliant from day one.