Introduction
The Texas Margins Tax, commonly known as the Texas Franchise Tax, is a gross receipts tax applied to businesses operating in Texas. Unlike a traditional income tax, the margins tax is based on a business’s total revenue, with deductions allowed for specific expenses.
This guide explains who must pay the tax, how it’s calculated, and how businesses can reduce their liability.
What Is the Texas Margins Tax?
The Texas Margins Tax (Franchise Tax) is a state-level tax on businesses based on total revenue rather than profits.
- It applies to LLCs, corporations, and partnerships that generate over $2.47 million in annual revenue.
- Businesses below the $2.47 million threshold do not owe tax but must file a No Tax Due Report.
Who Has to Pay the Texas Margins Tax?
Businesses Subject to the Tax
- LLCs (Single & Multi-Member)
- Corporations (C-Corps & S-Corps)
- Limited Partnerships (LPs & LLPs)
- Banks & Financial Institutions
Businesses Exempt from the Tax
- Sole proprietorships (unless registered as an LLC).
- General partnerships (if owned only by individuals).
- 501(c)(3) nonprofits.
- Certain passive investment entities.
Texas Margins Tax Rates for 2025
| Business Type | Annual Revenue Threshold | Tax Rate |
|---|---|---|
| Businesses Below $2.47M | No tax due | 0% |
| Retail & Wholesale Businesses | Over $2.47M | 0.375% |
| Other Businesses | Over $2.47M | 0.75% |
| E-Z Computation (Revenue Under $20M) | Flat tax on revenue | 0.331% |
E-Z Computation Method
- Available for businesses under $20 million in revenue.
- Uses a 0.331% flat tax rate but does not allow deductions.
How to Calculate the Texas Margins Tax
Formula
Taxable Revenue = Total Revenue – Allowable Deductions
Tax Due = Taxable Revenue × Tax Rate
Allowable Deductions
Businesses can deduct the greater of:
- Cost of Goods Sold (COGS) – Expenses related to manufacturing or reselling goods.
- Wages & Compensation – Up to $400,000 per employee.
- 30% Standard Deduction – Deduct 30% of total revenue if it results in a lower tax bill.
Example Calculation
- Business Revenue: $5,000,000
- Cost of Goods Sold (COGS): $2,000,000
- Taxable Revenue: $5,000,000 – $2,000,000 = $3,000,000
- Tax Due (Retail Business): $3,000,000 × 0.375% = $11,250
How to File the Texas Margins Tax
Step 1: Determine Your Filing Requirement
- No Tax Due Report – If revenue is below $2.47 million.
- Standard Franchise Tax Report – If revenue is above $2.47 million.
Step 2: File Online or by Mail
- Submit forms through the Texas Comptroller’s eSystems portal.
- Required forms:
- Form 05-158 (Long Form) – For businesses using deductions.
- Form 05-169 (E-Z Computation Report) – For businesses under $20M using the flat rate.
Step 3: Pay Tax Due (If Applicable)
- Payment methods: ACH transfer, credit card, or check.
- Electronic payment is required if the tax due is over $10,000.
Texas Margins Tax Deadlines
| Filing Type | Due Date |
|---|---|
| Annual Margins Tax Return | May 15 each year |
| Extension Request (Form 05-164) | May 15 (extension until November 15) |
Late filings can result in:
- 5% penalty if filed 1-30 days late.
- 10% penalty if filed more than 30 days late.
- Loss of good standing with the state if not filed.
Penalties for Late Filing or Non-Payment
| Violation | Penalty |
|---|---|
| Late Filing | $50 penalty (even if no tax is due) |
| Late Payment | 5% penalty if under 30 days late, 10% if over 30 days |
Failure to File for Two+ Years Business may be forfeited or revoked
If tax remains unpaid, businesses may face interest charges and collection actions.
How to Reduce Texas Margins Tax Liability
- Choose the Best Deduction Method – Compare COGS, wages, or the 30% standard deduction to lower taxable revenue.
- Use the E-Z Computation Method – If revenue is under $20M, the 0.331% flat rate may be better.
- Plan Business Expenses Strategically – Investing in equipment, R&D, and employee wages can reduce taxable revenue.
How the Texas Margins Tax Compares to Other States
| State | Franchise Tax or Corporate Income Tax? | Tax Rate |
|---|---|---|
| Texas | Franchise Tax (Margins Tax) | 0.375% – 0.75% |
| California | Corporate Income Tax | 8.84% |
| New York | Corporate Franchise Tax | 6.5% |
| Florida | Corporate Income Tax | 5.5% |
Texas has no corporate income tax, but the margins tax acts as a substitute business tax.
Should You Work with a CPA for Texas Margins Tax?
A CPA can help:
- Choose the best deduction strategy to minimize tax liability.
- Ensure compliance with Texas franchise tax laws.
- Handle tax filings and avoid penalties.
Conclusion
The Texas Margins Tax applies to businesses earning more than $2.47 million. Filing on time and choosing the right deduction method can help businesses minimize tax liability and avoid penalties.
For expert franchise tax planning, schedule a meeting with our CPA Anshul Goyal by clicking at https://calendly.com/anshulcpa/ now.