Introduction
Texas does not have a state income tax, but it does impose a franchise tax on businesses. The Texas Franchise Tax is a gross receipts tax applied to businesses earning over a certain threshold. This tax helps fund state services, infrastructure, and education.
This guide explains who must pay Texas Franchise Tax, how to calculate it, filing deadlines, and how to avoid penalties.
Who Needs to Pay Texas Franchise Tax?
Businesses must pay the Texas Franchise Tax if they meet both of these conditions:
- They operate in Texas or are registered with the Texas Secretary of State.
- They have total revenue exceeding $2.47 million (for 2025).
Business Types Subject to Franchise Tax
- LLCs (Single-Member & Multi-Member)
- Corporations (C-Corps, S-Corps, and Professional Corporations)
- Partnerships (Limited Partnerships & Limited Liability Partnerships)
- Banks & Savings Associations
Exempt Businesses
The following businesses do not owe Texas Franchise Tax:
- Sole Proprietorships (not registered as LLCs or corporations).
- General Partnerships (owned by individuals).
- Nonprofit Organizations (approved tax-exempt entities).
- Certain Passive Entities (real estate investment trusts, passive investment vehicles).
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 opt for E-Z Computation.
- The E-Z tax rate is 0.331%, but no deductions are allowed.
How to Calculate Texas Franchise Tax
Standard Calculation Method:
Taxable Revenue = Total Revenue – Allowable Deductions
- Allowable Deductions:
- Cost of Goods Sold (COGS)
- Wages & Compensation (limited to $400,000 per person)
- 30% Standard Deduction
Tax Due = Taxable Revenue × Franchise Tax Rate
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 Return
Step 1: Gather Business Information
- Total Revenue from IRS Tax Return
- Allowable Deductions (COGS, Wages, or Standard Deduction)
- Texas Taxpayer ID (11-digit number issued by the Texas Comptroller)
Step 2: Log Into Texas eSystems Portal
- Visit the Texas Comptroller eSystems website.
- Select “Webfile for Franchise Tax.”
- Log in using your Taxpayer ID and Webfile Number.
Step 3: Select the Filing Year
- Choose the reporting period for the return.
Step 4: Enter Revenue and Deductions
- Enter total gross revenue from the business tax return.
- Choose a deduction method (COGS, wages, or 30% standard deduction).
Step 5: Calculate and Submit Return
- The system will calculate franchise tax due.
- Review all entries and submit the return.
Step 6: Make Payment (If Required)
- Pay tax due via ACH, credit/debit card, or check.
- If no tax is owed, businesses must still file a “No Tax Due” Report.
Texas Franchise Tax Deadlines
| Filing Type | Due Date |
|---|---|
| Annual Franchise Tax Return | May 15 each year |
| Extension Request (Form 05-164) | Due May 15 (grants until November 15) |
If the due date falls on a weekend or holiday, the deadline moves to the next business day.
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 |
Failure to File for Two+ Years Business may be forfeited or revoked
Businesses with unpaid tax may face interest charges and collection actions by the Texas Comptroller.
Common Mistakes to Avoid When Filing Texas Franchise Tax
- Missing the May 15 Deadline – Even if no tax is due, the $50 penalty applies for late reports.
- Choosing the Wrong Deduction Method – The best deduction method depends on business expenses.
- Not Filing a No Tax Due Report – Even tax-exempt businesses must file annually.
- Underreporting Revenue – Inaccurate reporting may lead to audits and penalties.
How to Reduce Texas Franchise Tax Liability
- Use the Most Beneficial Deduction – Compare COGS, wages, and standard deduction to lower taxable revenue.
- Choose the E-Z Computation Method – If revenue is under $20M, the 0.331% flat rate may be better.
- Plan Business Expenses – Reducing taxable revenue through strategic expenses can lower tax liability.
IRS Compliance for Texas Businesses
Even though Texas does not have a corporate income tax, businesses must still file federal tax returns:
| Business Type | Federal Tax Form | State Tax Requirement |
|---|---|---|
| LLC (Single-Member) | Schedule C (Form 1040) | Franchise tax (if applicable) |
| LLC (Multi-Member) | Form 1065 & K-1s | Franchise tax (if applicable) |
| S-Corp | Form 1120S | Franchise tax (if applicable) |
| C-Corp | Form 1120 | Franchise tax (if applicable) |
Conclusion
Texas Franchise Tax applies to businesses earning more than $2.47 million in revenue. 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 don’t 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.