Introduction
Texas does not impose a corporate income tax, but businesses operating in the state may be subject to the Texas Franchise Tax. This tax applies to certain businesses based on their gross revenue rather than their net profits.
This guide explains who must pay the Texas Franchise Tax, how to calculate it, and how businesses can reduce their tax liability.
What Is the Texas Franchise Tax?
The Texas Franchise Tax is a gross receipts tax imposed on businesses earning over $2.47 million in annual revenue.
Instead of taxing profits, the state taxes a business’s total revenue minus allowable deductions.
- Applies to LLCs, corporations, partnerships, and certain nonprofits.
- Businesses below the $2.47 million threshold do not owe franchise tax but still must file a No Tax Due Report.
Who Has to Pay the Texas Franchise Tax?
Businesses That Must Pay Franchise Tax
- LLCs (Single-Member & Multi-Member)
- Corporations (C-Corps, S-Corps, and Professional Corporations)
- Limited Partnerships & Limited Liability Partnerships
- Banks & Savings Associations
Businesses Exempt from Franchise Tax
- Sole Proprietorships (not registered as LLCs or corporations).
- General Partnerships (if owned by individuals).
- 501(c)(3) Nonprofits.
- Certain passive entities (e.g., real estate investment trusts).
Texas Franchise 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 for Businesses Under $20M | Flat tax on revenue | 0.331% |
E-Z Computation Method
- Businesses with revenue under $20 million can use the E-Z Computation Method to simplify tax filing.
- The E-Z tax rate is 0.331%, but businesses using this method cannot take deductions.
How to Calculate Texas Franchise Tax
Formula:
Taxable Revenue = Total Revenue – Allowable Deductions
Tax Due = Taxable Revenue × Tax Rate
Allowable Deductions
- Cost of Goods Sold (COGS)
- Wages & Compensation (limited to $400,000 per person)
- 30% Standard Deduction
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 Texas Franchise 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 over $2.47 million.
Step 2: File Online or by Mail
- File through the Texas Comptroller eSystems portal.
- Forms required: Form 05-158 (Long Form) or Form 05-169 (E-Z Computation Report).
Step 3: Pay Tax Due (If Applicable)
- Pay via ACH transfer, credit card, or check.
- Electronic payment is required if the tax due is over $10,000.
Texas Franchise Tax Deadlines
| Filing Type | Due Date |
|---|---|
| Annual Franchise Tax Return | May 15 each year |
| Extension Request (Form 05-164) | May 15 (grants extension until November 15) |
Late filings can result in penalties, including:
- 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 less than 30 days late; 10% if more than 30 days late |
If tax remains unpaid, businesses may face interest charges and collection actions.
How to Reduce Texas Franchise 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 – Reducing taxable revenue through business investments can lower tax liability.
How Texas Franchise Tax Compares to Other States
| State | Franchise Tax or Corporate Income Tax? | Tax Rate |
|---|---|---|
| Texas | Franchise 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 is more business-friendly than states with high corporate income taxes, making it attractive for LLCs and corporations.
Should You Work with a CPA for Texas Franchise 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
Texas Franchise 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.
Frequently Asked Questions (FAQs)
1. Who has to pay Texas Franchise Tax?
Businesses with over $2.47 million in revenue, including LLCs, corporations, and partnerships.
2. When is Texas Franchise Tax due?
May 15 each year.
3. What happens if I do not pay my Texas Franchise Tax?
A $50 late filing fee, 5-10% penalties, and possible business forfeiture.
4. Can I lower my Texas Franchise Tax?
Yes, by using deductions or choosing the E-Z Computation Method.
5. Should I hire a CPA for Texas Franchise Tax filing?
Yes, a CPA can help choose the best deduction method and ensure compliance.