Texas Franchise Tax Guide: Who Must File And Pay

Introduction

The Texas Franchise Tax is one of the state’s primary business taxes and applies to most entities operating in Texas.
Even though Texas has no personal or corporate income tax, most business entities are required to file a franchise tax report each year with the Texas Comptroller of Public Accounts.
This guide explains who must file, how to calculate the tax, what forms are required, and how to remain compliant in 2025.

Step 1: What Is the Texas Franchise Tax

The Texas Franchise Tax, also known as the margin tax, is a privilege tax for doing business in Texas.
It applies to entities formed in Texas or doing business in the state, including:

• Limited Liability Companies (LLCs)
• Corporations (C-Corps and S-Corps)
• Partnerships (Limited and Limited Liability)
• Professional Associations
• Joint Ventures

Example:
A Texas-registered LLC with annual revenue of $3 million must file a franchise tax report even if it ultimately owes no tax due to deductions or credits.

Step 2: No-Tax-Due Threshold for 2025

For the 2025 filing year, the no-tax-due threshold is $2.47 million in total annual revenue.

If your entity’s revenue is below this threshold:

• You owe no franchise tax, but
• You must still file a No-Tax-Due Report with the Texas Comptroller by May 15, 2025.

Failing to file can lead to penalties and forfeiture of your entity’s “active” status.

Step 3: How to Calculate the Texas Franchise Tax

Entities with revenue exceeding $2.47 million must compute taxable margin using the lowest of these four methods:

1. Total Revenue × 70%
2. Total Revenue – Cost of Goods Sold (COGS)
3. Total Revenue – Compensation
4. Total Revenue – $1 million

After determining your taxable margin, apply the applicable tax rate:

• 0.375% for retail and wholesale businesses.
• 0.75% for all other businesses.

Example:
A consulting firm with $4 million in revenue and $1 million in expenses has a margin of $3 million.
At 0.75%, the franchise tax due equals $22,500.

Step 4: Required Forms and Filings

Most businesses will file the following with the Texas Comptroller:

Note: All reports can be filed electronically using the Texas Webfile System on the Comptroller’s website.

Step 5: Entities Exempt from Texas Franchise Tax

The following entities are exempt from the franchise tax:

• Sole proprietorships (unless registered as LLCs).
• Certain passive investment entities.
• Some non-profit organizations.
• Certain trusts, estates, and grantor entities.
• Insurance companies paying state gross premiums tax.

Example:
A single-member sole proprietorship selling handmade crafts does not pay or file franchise tax unless it elects to form an LLC.

Step 6: How to Pay and File Online

Businesses can file and pay via the Texas Comptroller’s Webfile Portal.

Steps:

1. Log in using your taxpayer number.
2. Report total revenue and compute margin.
3. Complete and submit Form 05-158.
4. Pay tax due via ACH or credit card.
5. Retain confirmation for records.

If you need an extension, file Form 05-164 and pay 90% of your estimated tax by May 15.

Step 7: Penalties for Late Filing

Texas imposes strict penalties for missing the filing or payment deadline:

• 5% penalty if tax is paid 1–30 days late.
• 10% penalty if paid more than 30 days late.
• Forfeiture of entity status with the Secretary of State if you fail to file for multiple years.

Once forfeited, owners lose the right to transact business or maintain legal protection until reinstated.

Step 8: How to Reduce Franchise Tax Liability

Businesses can reduce their Texas franchise tax through:

1. Cost of Goods Sold (COGS) Deduction
   • Deduct costs directly tied to production or resale.
2. Compensation Deduction
   • Deduct W-2 wages and benefits paid to employees.
3. R&D Tax Credit
   • Claim credits for qualifying research activities conducted in Texas.
4. Apportionment Planning
   • Allocate revenue between states based on business operations to reduce taxable Texas margin.

Example:
A manufacturer with facilities in both Texas and Oklahoma may apportion revenue to reflect sales generated outside Texas, reducing its taxable margin.

Conclusion

The Texas Franchise Tax is an essential compliance requirement for nearly all Texas entities.
Even if your business earns below the no-tax-due threshold, timely filing is mandatory to maintain good standing.
By accurately calculating margins, leveraging deductions, and staying ahead of deadlines, Texas business owners can stay compliant while minimizing tax exposure in 2025.

Call to Action

For professional help calculating, filing, or optimizing your Texas franchise tax, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and cross-border tax expert helping Texas businesses with compliance and tax efficiency.

Disclaimer

This article is for informational purposes only and does not constitute legal or tax advice. Always consult a qualified CPA before filing or paying your franchise tax.

Top 5 FAQs

1. Who must file a Texas Franchise Tax report?
   All taxable entities registered or doing business in Texas must file annually, even if no tax is due.
2. What is the 2025 no-tax-due threshold?
   $2.47 million in total annual revenue.
3. What is the Texas franchise tax rate?
   0.375% for retail/wholesale businesses and 0.75% for other entities.
4. When is the report due?
   May 15 each year.
5. What happens if I miss the deadline?
   Late filing can result in penalties, interest, and suspension of entity status.

About Our CPA

Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent admitted to practice before the IRS, and cross-border tax expert assisting Texas LLCs, corporations, and partnerships with franchise tax compliance, filings, and strategic planning.