Many founders and out-of-state business owners believe Texas has a gross-receipts tax. While technically false, this myth exists because the Texas Franchise Tax – also known as the margin tax – functions similarly by taxing total revenue with limited deductions. Let’s debunk this and explain what Texas actually taxes in 2025.
Is There a Gross-Receipts Tax in Texas?
No, Texas does not impose a pure gross-receipts tax.
But it does impose a Franchise Tax on entities with nexus in Texas, calculated using a margin, which starts with total revenue. That’s why many refer to it (mistakenly) as a gross-receipts tax.
Legal Basis:
- Texas Tax Code §171.101
- Administered by the Texas Comptroller
What’s Actually Taxed Under the Franchise (Margin) Tax?
Your “taxable margin” is based on one of the following:
- 70% of total revenue, or
- Total revenue minus COGS, or
- Total revenue minus compensation, or
- $1 million standard deduction (for eligible entities)
Then, you apply the Franchise Tax rate:
- 0.375% for retail/wholesale
- 0.75% for all others
- No tax due if total revenue is below the $2.47 million threshold (2025)
Common Myths Debunked
| Myth | Reality |
|---|---|
| Texas has a gross-receipts tax | Texas has a Franchise (margin) tax, not a gross-receipts tax |
| You pay tax on all revenue | Only taxable margin is taxed |
| Individuals are subject to Franchise Tax | Only entities (LLCs, Corps, LPs) are taxed |
| Income tax and margin tax are the same | Texas has no personal or corporate income tax |
| Deducting expenses isn’t allowed | COGS and compensation methods allow for deductions |
Example: Calculating Franchise Tax (2025)
Company: AI Logic LLC
Total Revenue (2024): $4,000,000
COGS: $1,200,000
Compensation: $900,000
Three Options:
- 70% Method: $2,800,000
- COGS Method: $2,800,000
- Compensation Method: $3,100,000
Best choice: COGS or 70%, margin = $2.8M
Franchise Tax = 0.75% × $2.8M = $21,000
Step-by-Step: Franchise Tax Filing in 2025
- Determine if revenue exceeds $2.47M
- Choose the best deduction method (COGS, Compensation, 70%)
- File Form 05-158-A (Long Form) or Form 05-163 (EZ)
- Pay by May 15, 2025 to avoid penalties
- Maintain records in case of audit
Conclusion
Texas doesn’t tax your gross receipts, but the Franchise Tax does use total revenue as its starting point – which creates confusion. For 2025, choose your deduction method wisely, understand your entity’s obligations, and avoid myths that could lead to overpayment or noncompliance.
Call to Action
Schedule a tax review with Anshul Goyal, CPA, EA, FCA to determine your optimal Franchise Tax strategy and clarify what’s truly taxed by Texas in your situation.
Disclaimer: This blog is educational in nature. Texas does not impose a gross-receipts tax but does levy Franchise Tax on margin, which is derived from total revenue. Always seek personalized advice before filing.
Top 5 High-Searched FAQs
1. Does Texas have a gross-receipts tax?
No. It has a Franchise (margin) tax based on total revenue.
2. What’s the threshold to file Texas Franchise Tax in 2025?
$2.47 million in total revenue.
3. Are sole proprietors subject to Franchise Tax?
No. Only legal entities like LLCs, Corporations, LPs are taxed.
4. Can I deduct business expenses in Texas?
Yes – via COGS or compensation deduction methods.
5. What form is used to file Franchise Tax in Texas?
Form 05-158-A for long form filers.
About Our CPA
Anshul Goyal, CPA, EA, FCA helps Texas businesses decode state tax rules. From clarifying franchise vs gross receipts misconceptions to optimizing margin deductions, he helps LLCs and startups file smart and stay compliant.