Texas has no personal income tax, which surprises a lot of people who move their business here. What Texas does have is the franchise tax, a tax on businesses for the privilege of operating in the state. Most small businesses end up owing nothing, but almost all of them still have to file something every year. Missing that filing is one of the most common, and most avoidable, problems I see.
Here is how it works.
Who is subject to the franchise tax
If your business is one of these and is formed or doing business in Texas, the franchise tax applies to you:
- Corporations (including S corporations)
- Limited liability companies (LLCs), including single-member LLCs
- Limited partnerships and limited liability partnerships
- Professional associations and business trusts
Some businesses are not subject to it. The main ones are sole proprietors (a business you run in your own name, without an LLC) and general partnerships owned directly by individuals. Certain nonprofits can also apply for an exemption.
If you formed an LLC for liability protection, you are in the franchise tax system even if you file your federal taxes as a sole proprietor.
The no-tax-due threshold: $2.65 million
For reports due in 2026 and 2027, a business with total annualized revenue of $2.65 million or less owes no franchise tax. That covers the large majority of small businesses.
If your revenue is above the threshold, the tax is calculated on your taxable margin, which is the smallest of these four amounts:
- 70% of total revenue
- Total revenue minus cost of goods sold
- Total revenue minus compensation paid
- Total revenue minus $1 million
The rate is 0.375% for businesses primarily engaged in retail or wholesale trade and 0.75% for most others. Businesses with $20 million or less in revenue can choose the simpler EZ computation at 0.331% of apportioned revenue, with no deductions.
Choosing between cost of goods sold and compensation can make a real difference, and that choice is only as good as your books. If your expenses aren't categorized correctly, you can't tell which method saves you more.
Owe nothing? You still have to file
This is the part people miss. Since 2024, businesses under the threshold no longer file a "No Tax Due Report," but every taxable entity must still file one of these each year:
- A Public Information Report (PIR), for corporations, LLCs and financial institutions, listing officers, directors or managers
- An Ownership Information Report (OIR), for partnerships and other entity types, listing owners
These are short forms, filed online through the Comptroller's website. They are easy to forget precisely because no payment is attached.
The deadline: May 15
Annual franchise tax reports, along with the PIR or OIR, are due May 15 each year. If May 15 falls on a weekend or holiday, the deadline moves to the next business day. The next one is May 15, 2027.
Extensions are available if you request them by the due date, but an extension to file is generally not an extension to pay. If you expect to owe, a payment is usually required with the extension request.
What happens if you don't file
- A $50 penalty for each report filed late, even when no tax is due
- Additional penalties and interest on any tax paid late
- If reports stay unfiled, the Comptroller can forfeit your right to do business in Texas. That can block you from defending yourself in Texas courts, and owners and officers can become personally liable for some business debts. Eventually, the Secretary of State can forfeit the entity's charter altogether.
Getting reinstated is possible, but it means filing every missing report, paying what's owed, and waiting on paperwork. Filing a five-minute report each May is far cheaper.
A simple checklist for every Texas business
- Confirm whether your entity type is subject to the franchise tax.
- Know your total revenue for the year from clean, reconciled books.
- If revenue is at or under $2.65 million, file your PIR or OIR by May 15.
- If revenue is over the threshold, compare the margin methods and the EZ computation, then file and pay by May 15.
- Put May 15 on your calendar now, with a reminder two weeks before.
Getting it right without the stress
The franchise tax itself is rarely the hard part. The hard part is having accurate revenue and expense figures when the deadline arrives. When your books are reconciled every month, filing in May takes minutes instead of a scramble.
I keep the books and handle franchise tax filings for Texas businesses, all online. If you'd like this off your plate, book a short intro call.
This article is general information, not tax advice for your specific situation. Thresholds and rates are set by the Texas Comptroller and change every two years.