Texas is often considered a business-friendly state, and for good reason. It offers fair business regulations, generous economic incentives, and no corporate income tax. The state also makes it easier for employers to attract quality employees from across the nation thanks to its lack of a personal income tax. Even so, the state government still needs revenue, and one way it collects money is through a franchise tax.
This article provides an overview of the state’s franchise tax, covering which businesses must pay it, how the amount is calculated, what the threshold means, and what every LLC, whether it must pay any tax, needs to file annually. If you have a business that operates in Texas, it is important to understand this information.
So what is the Texas franchise tax, anyway?
Despite its name, Texas’ franchise tax does not only apply to franchises. While the name may be confusing, at its core, the franchise tax is a tax on the privilege of doing business in Texas. It’s administered by the Texas Comptroller of Public Accounts and applies to most business entities, including Texas LLCs, corporations (both S Corporations and C Corps), limited partnerships, and general partnerships that aren’t owned directly by individuals and operate in Texas. Sole proprietorships and general partnerships owned directly by individuals aren’t subject to the tax. Some other entities, such as certain nonprofits, can qualify for an exemption.
Don’t be confused. The Texas franchise tax is not an income tax. The amount owed is not based on a business’s profits but on its revenue. This is a critical distinction because, unlike income taxes, franchise tax requirements still apply to businesses even if they are unprofitable.
Does your LLC have to pay Texas franchise tax?
The good news is that although almost every business operating in Texas must file an information report with the state Comptroller, most LLCs do not actually owe money. LLCs, corporations and limited partnerships file the Public Information Report (PIR); the Ownership Information Report (OIR) is for associations, trusts and other entities. Any business that is at or below the annual cutoff amount owes zero franchise tax. This process changed when Texas discontinued the No Tax Due Report (Form 05-163) for reports due in 2024 and later, so even experienced business owners may want to review the current requirements.
Although the exact no-tax-due threshold can change from year to year, for 2026 and 2027 reports the no tax due threshold is $2.65 million in annualized total revenue. Businesses above it also owe nothing if the tax works out to less than $1,000, but they still file a full report. For the latest minimums, deductions, and payment rates, it is a good idea to check the Texas Comptroller of Public Accounts website.
Remember that even if your company is based in another state, if it does business in Texas, you may still have to pay the franchise tax depending on your company’s apportioned in-state revenue.
How is the Texas franchise tax calculated?
If your business is close to or exceeds the no-tax-due threshold, talk to an experienced business accountant. Your accountant can walk you through the process, but it’s still helpful to have a general idea of how the franchise tax bill is generated.
It starts with calculating your business’ taxable margin. There are four accepted ways to do this based on your company’s total revenue from your federal tax return: a straight 70% of your business’ total revenue; total revenue minus the costs of goods sold; total revenue minus payroll and other compensation; or revenue minus $1 million.
Calculate the number for all methods, then choose the lowest number, apportion it to Texas (Texas receipts divided by total receipts), and multiply it by the standard rate of 0.75%, or 0.375% for retail and wholesale businesses. This is your franchise tax bill.
Businesses with revenues under $20 million can choose to use the EZ Computation option by paying a flat 0.331% of their apportioned total revenue. The EZ method allows no deductions or credits.
When is it due?
Texas franchise tax reports and payments are generally due on May 15, with the first report due May 15 of the year after your LLC becomes subject to the tax. You do not need to file in the initial year you form your business.
An extension can give you until November 15 to file your franchise tax report, but only if you pay 90% of the current year tax or 100% of the prior year tax by May 15. Electronic (EFT) payers get an extension to August 15 first, and first-year filers can’t use the 100% option. The extension covers filing deadlines, but not payment of any taxes owed. Any tax not paid by May 15 still accrues penalties and interest.
How to file
You will want to speak with your accountant for guidance, but downloading Form 05-915, which walks you through the filing and payment process line by line, can help you fully understand the franchise tax.
All businesses need to file an information report (LLCs file the Public Information Report), and businesses with taxable revenue must also submit payment. How you do that depends on which of the following categories your business falls under:
- Businesses with revenue at or below the threshold only need to file the information report. LLCs file the PIR (Form 05-102) through the state Comptroller’s Webfile system or by mail.
- Businesses with revenue above the threshold but at or below $20 million can choose to file either the EZ Computation Report or the Long Form.
- Businesses with revenue above $20 million must file using the Long Form.
What happens if you miss the deadline?
If your business isn’t exempt from the franchise tax, you must file and pay any tax due by the deadline. Filing late will result in penalties and interest, even if your business does not owe any franchise tax. As of 2026, these late penalties and interest are:
- Late filings will result in a $50 penalty, regardless of whether you owe tax.
- For any business that must pay the franchise tax but doesn’t, a 5% penalty is assessed on the tax bill within the first 30 days. Delinquent tax bills more than 30 days past due have a 10% penalty assessment, plus another 10% if you pay after the date on the Comptroller’s Notice of Tax Due.
- Interest begins 61 days after the due date.
If you don’t file or pay within 45 days of a delinquency notice, the Comptroller forfeits your LLC’s right to transact business in Texas. Managers and officers can then be personally liable for debts the LLC takes on after the report or tax was due. If it’s still unresolved 120 days later, the Secretary of State can forfeit the LLC’s certificate of formation.
A business that loses the ability to operate in the state must seek reinstatement by filing all missing records; paying all outstanding taxes, fees, and interest; getting a tax clearance letter from the Comptroller; and then filing an Application for Reinstatement (Form 801, $75) with the Secretary of State.
Common mistakes Texas LLC owners make
Many of the issues business owners face stem from assuming the franchise tax works like other taxes. Understanding the most common mistakes helps you avoid them:
- Assuming no revenue means no filing obligation. Unless your business is exempt (such as a sole proprietorship or certain general partnerships), your LLC must file a PIR even if it earns no revenue.
- Not comparing the margin calculation methods. If your business needs to pay the franchise tax, choosing the wrong margin calculation method will cost you money.
- Out-of-state LLC owners may not realize that the Texas franchise tax still applies to them. Businesses that operate in Texas may still need to file and may owe Texas franchise tax based on their apportioned revenue.
- Confusing filing a report and making a payment. Although the deadlines for filing the PIR and paying any tax are both on May 15, each one is separate and has different requirements.
Learning about the Texas franchise tax and giving yourself enough time to file and, if necessary, pay, is the best way to avoid problems.
How this fits into your broader LLC compliance
Owning any business comes with compliance requirements, and the franchise tax is just one of them. Other critical pieces of the compliance puzzle include:
- Applying for an Employer Identification Number (EIN)
- Updating current ownership and management information
- Finding and maintaining a registered agent
- Tracking income and expenses
- Filing the required company reports on time
It can be difficult to keep track of everything, especially if you run a small business, but the good news is you don’t have to do it alone. Companies like Tailor Brands offer a range of services that assist you with LLC formation, EIN registration, hiring a registered agent, bookkeeping, and other compliance support, which can give you peace of mind.
Conclusion
For your Texas LLC, the Texas franchise tax can seem a little confusing at first, but once you learn the basics, it’s not so scary. Although most LLCs won’t owe franchise tax on top of their other Texas LLC costs, it’s always a good business idea to consult with a tax professional, especially if you are new to doing business in Texas or have a complicated tax situation.