TEXAS BUSINESS LAW
How to Calculate Texas Franchise Tax: A Plain Guide
To calculate Texas franchise tax, first check whether your annualized total revenue is below the no-tax-due threshold — if it is, you owe no tax (though you still must file an information report); if it’s above, you figure your taxable margin using the lowest of four allowed methods and apply your rate. It’s called a “franchise” tax, but it has nothing to do with franchising — it’s Texas’s main tax on business entities, often called the margin tax, and it’s based on a version of revenue, not on profit.
Here’s how it works, step by step, with the figures current as of mid-2026. Thresholds and per-person caps adjust over time, so confirm the year’s numbers on the Comptroller’s site before filing.
Who Owes Texas Franchise Tax
The franchise tax applies to most taxable entities formed in or doing business in Texas — corporations, LLCs, limited partnerships, and similar entities. Sole proprietorships and most general partnerships owned entirely by individuals are not subject to it. Texas has no personal income tax and no traditional corporate income tax; the franchise tax is what stands in their place.
If you own a Texas entity, this tax is part of staying in good standing — and unpaid franchise tax is one of the liabilities a buyer screens for during a business sale.
Step 1: Check the No-Tax-Due Threshold
Most small businesses never owe franchise tax, because revenue below a set threshold means zero tax. For the 2026 report year, the no-tax-due threshold is $2.65 million in annualized total revenue (it was $2.47 million for 2025; it is adjusted periodically). If your annualized total revenue is at or below the threshold, you owe no franchise tax.
Important: owing no tax is not the same as filing nothing. Texas eliminated the standalone “No Tax Due Report” effective January 1, 2024, but entities below the threshold must still file a Public Information Report (PIR) or Ownership Information Report (OIR) each year. Miss it, and you risk penalties and even forfeiture of your right to do business in Texas.
Step 2: Calculate Total Revenue
If you’re above the threshold, start from total revenue, which Texas derives from specific lines of your federal income tax return, with certain statutory exclusions. This is the foundation of the whole calculation, so it has to be right — it begins from your federal numbers but is not identical to them.
Step 3: Determine Your Taxable Margin
This is the heart of the calculation. Your taxable margin is the lowest of these four amounts — you may use whichever produces the smallest number:
| Method | Taxable margin equals |
|---|---|
| 70% of revenue | Total revenue × 70% |
| Minus COGS | Total revenue − cost of goods sold |
| Minus compensation | Total revenue − compensation (wages and benefits, subject to a per-person cap that adjusts) |
| Minus $1 million | Total revenue − $1,000,000 |
You then apportion that margin to Texas based on your Texas-sourced gross receipts as a share of total receipts, so only your Texas activity is taxed. Choosing the right method matters: a labor-heavy business often does best with the compensation deduction, while a product business usually does best subtracting COGS. Running all four is the only way to know.
Step 4: Apply the Rate
Apply the rate that matches your business:
- 0.375% for entities primarily engaged in retail or wholesale trade.
- 0.75% for all other entities.
There’s also an optional EZ computation for entities with total revenue of $20 million or less: skip the margin steps and apply a flat 0.331% to apportioned total revenue. It’s simpler but not always cheaper — compare it against the margin calculation, because the regular method frequently produces a lower bill.
Filing and Deadlines
Texas franchise tax reports are generally due May 15 each year. Above-threshold entities file the appropriate report (the EZ computation report or the long form) plus the PIR or OIR; below-threshold entities file the information report alone. Late filing or payment triggers penalties and interest, and continued non-compliance can lead to forfeiture of the entity’s privileges. Because the figures and forms change, verify the current year’s threshold, rates, and forms on the Texas Comptroller’s website or with your tax advisor before you file.
Frequently Asked Questions
Does the Texas franchise tax have anything to do with franchising?
No. Despite the name, it’s a general tax on business entities operating in Texas — corporations, LLCs, partnerships, and similar entities — and applies whether or not the business is a franchise. It’s commonly called the margin tax.
Do I have to file if my business owes no franchise tax?
Yes. Even below the no-tax-due threshold, you must file a Public Information Report or Ownership Information Report each year. Texas removed the separate “No Tax Due Report” in 2024, but the information report is still mandatory, and skipping it carries penalties.
How is taxable margin calculated in Texas?
Your taxable margin is the lowest of four figures: 70% of total revenue; revenue minus cost of goods sold; revenue minus compensation; or revenue minus $1 million. You then apportion that margin to Texas and apply your rate. Most businesses run all four to find the smallest result.
What are the current Texas franchise tax rates?
As of mid-2026, the rate is 0.75% of taxable margin for most entities and 0.375% for retailers and wholesalers. Entities with $20 million or less in total revenue may instead elect the EZ computation at 0.331% of apportioned revenue. Confirm current rates before filing, as they can change.
Texas franchise tax is easy to underestimate and costly to get wrong — and it’s one of the obligations that follows a business through a sale. Reidel Law Firm advises Texas business owners and buyers on entity compliance and transactions. Talk to a Texas business attorney →
