The Texas Franchise Tax: Who Owes It, Who's Exempt, and How to Stay in Good Standing

By Hank FasthoffJuly 5, 2026

Texas doesn't impose a state income tax on individuals or businesses, but it does impose a franchise tax (sometimes called a margin tax) on most legal entities for the privilege of doing business in the state. Every LLC, corporation, limited partnership, limited liability partnership, professional association, and business trust organized in Texas or doing business in Texas is subject to franchise tax reporting, even if it owes nothing. Missing that filing obligation is one of the most common reasons Texas entities lose their good standing, and losing good standing can prevent a company from enforcing contracts, maintaining lawsuits, and transacting business until it's reinstated.

Who Owes It

Almost every entity that isn't a sole proprietorship or a general partnership composed entirely of natural persons owes a franchise tax report. Single-member LLCs, multi-member LLCs, S corporations, C corporations, limited partnerships, LLPs, and business trusts are all taxable entities under Texas Tax Code Chapter 171, regardless of how they're classified for federal tax purposes. An LLC treated as a disregarded entity by the IRS still owes a franchise tax report to Texas.

Whether you owe tax depends on your revenue. Whether you owe a report doesn't. Even entities with zero revenue must file an information report with the Texas Comptroller every year.

The No-Tax-Due Threshold

For the 2026 report year (covering 2025 fiscal year activity), the no-tax-due threshold is $2,650,000 in annualized total revenue. Entities below that threshold owe no franchise tax. For the 2024 and 2025 report years, the threshold was $2,470,000.

"Annualized" means the Comptroller adjusts your total revenue to reflect a full 12-month period. If your entity was in existence for only six months and reported $1.5 million in total revenue, your annualized revenue is $3 million, which exceeds the threshold even though your reported revenue for the short period didn't.

Entities at or below the no-tax-due threshold aren't required to file a No Tax Due Report (effective for reports due on or after January 1, 2024). But they must still file a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167) by May 15 of each year. Skipping this filing because you don't owe tax is the single most common franchise tax mistake, and it's what leads to forfeiture.

Tax Rates and Computation Methods

Entities above the no-tax-due threshold calculate franchise tax on their "taxable margin," which is the lesser of 70 percent of total revenue, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million. You pick the method that produces the lowest taxable margin, then multiply by the applicable rate.

For most entities, the tax rate is 0.75 percent of taxable margin. Retailers and wholesalers (entities primarily engaged in retail or wholesale trade) pay a reduced rate of 0.375 percent. These rates apply to entities filing the Long Form (Form 05-158).

Entities with annualized total revenue of $20 million or less can elect to file the E-Z Computation (Form 05-169) instead. Under the E-Z Computation, you multiply your apportioned total revenue by 0.331 percent. The E-Z Computation is simpler, but it doesn't allow you to subtract cost of goods sold or compensation, and it doesn't allow you to claim most franchise tax credits. For entities with significant COGS or compensation relative to revenue, the Long Form usually produces a lower tax bill. For entities with thin margins or low expenses, the E-Z Computation may be advantageous.

Filing Deadlines and Extensions

Franchise tax reports are due May 15 of each year. If May 15 falls on a weekend or state holiday, the deadline shifts to the next business day. Reports can be filed electronically through the Comptroller's Webfile system.

An extension to November 15 is available, but you must either pay at least 90 percent of the current year's tax or 100 percent of the prior year's tax by the original May 15 deadline. If you don't make the required extension payment, the extension isn't valid and penalties begin accruing from May 15.

Penalties and Interest

A $50 late-filing penalty applies to every report filed after the due date, even if no tax is owed. If you owe tax and pay late, a 5 percent penalty applies for payments made one to 30 days after the due date, increasing to 10 percent for payments made more than 30 days late. Interest begins accruing 61 days after the due date at a rate set annually by the Comptroller (prime rate plus one percent).

A company that filed its PIR three months late owes a $50 penalty even though it owed no tax. A company that owed $10,000 in franchise tax and paid 45 days late owes a $1,000 penalty (10 percent) plus interest.

Forfeiture and What It Does to Your Business

Continued failure to file franchise tax reports triggers a forfeiture process. The Comptroller sends a Notice of Intent to Forfeit, giving the entity 45 days to cure the delinquency. If the entity doesn't file and pay within that window, the Comptroller forfeits the entity's right to transact business in Texas.

After the Comptroller acts, the Secretary of State can forfeit the entity's certificate of formation (for domestic entities) or registration (for foreign entities). Once forfeited, the entity can't enforce contracts, maintain lawsuits, defend lawsuits in its own name, or transact business in Texas. Officers and directors of a forfeited corporation can become personally liable for debts the entity incurs during the forfeiture period, which eliminates the limited liability protection the entity was formed to provide.

Forfeiture suspends the entity's privileges while the entity itself continues to exist. But while the entity is forfeited, every transaction it enters and every obligation it incurs carries personal liability risk for the people behind it.

How to Reinstate

Reinstatement requires filing all delinquent reports (including every missed PIR or OIR), paying all outstanding tax, penalties, and interest, and requesting a Tax Clearance Letter from the Comptroller. Once you receive the clearance letter, you file reinstatement paperwork with the Secretary of State and pay the reinstatement fee.

Reinstatement cost depends on how many years of reports are delinquent. An entity that missed three years of PIR filings (no tax owed, $50 penalty per missed report) can reinstate for a few hundred dollars in penalties and fees. An entity that missed three years of franchise tax payments owes the tax, 10 percent penalties on each year, and interest running from 61 days after each due date.

Reinstatement is retroactive. Once reinstated, the entity is treated as if it remained in good standing continuously. But the personal liability exposure during the forfeiture period isn't retroactively cured, and any contracts entered during forfeiture may face enforceability challenges.

Who's Exempt

Sole proprietorships aren't subject to the franchise tax because they aren't separate legal entities under Texas law. General partnerships composed entirely of natural persons (not LLCs, corporations, or other entities) are also exempt. Certain passive entities as defined in Texas Tax Code § 171.0003 are exempt from the tax itself (though they must still file a report). REITs meeting the qualifications in Texas Tax Code § 171.0002(c)(4) can file either the E-Z Computation or Long Form and complete only the taxpayer information section.

Qualified new veteran-owned businesses are exempt from franchise tax for their first five years of existence. SB 524 (2025) made this exemption permanent. To qualify, the business must be 100 percent owned by honorably discharged U.S. veterans who are Texas residents, and each veteran can claim the exemption for only one business at a time. Qualifying businesses also receive a waiver of the Secretary of State's $300 formation filing fee.

What You Should Do

File every year, even if you owe nothing. If your entity's annualized total revenue is below $2.65 million, you owe no tax, but you owe a PIR or OIR. File it by May 15. Five minutes of work prevents forfeiture.

Set a calendar reminder for May 15. Franchise tax is an annual obligation with a fixed deadline, and the Comptroller's first notice arrives after you've already missed it. By the time you receive a Notice of Forfeiture, you're already delinquent and penalties are accruing.

Choose your computation method deliberately. If your revenue is under $20 million, compare the E-Z Computation result against the Long Form result using each of the four margin calculation methods. A few minutes of comparison can produce meaningful tax savings.

If you're a foreign entity doing business in Texas (a Delaware LLC or Delaware corporation that operates in Texas, for example), you're subject to the same franchise tax reporting obligations as a domestic entity. Foreign qualification subjects you to the franchise tax.

If your entity has been forfeited, don't ignore it. Every day of forfeiture is a day of personal liability exposure. File the delinquent reports, pay the penalties and interest, obtain the clearance letter, and reinstate as quickly as possible. The cost of reinstatement is always less than the cost of operating without the entity's liability protection.