Published June 20, 2025
What Is the Texas Franchise Tax? 5 Things You Should Know
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Updated - Originally published February 23, 2025
The Texas Comptroller defines the Texas franchise tax as “a privilege tax” that is required of “each taxable entity formed or organized in Texas or doing business in Texas.” Put a little more simply, it is a fee for the right to conduct a substantial amount of business in Texas.
A franchise tax is different from sales tax. Texas has both a sales tax and a franchise tax (but no personal income tax) so, in practice, the franchise tax functions like an additional fee on top of your sales tax.
Unlike sales tax—where the consumer is responsible for the expense and companies just gather and remit it—franchise tax comes out of your pocket. This means the franchise tax could actually cost your business more money than sales tax. (Assuming you’re compliant.)
Here are the five big questions I often hear from executives and owners doing business in Texas.
Any taxable entity registered in the state is subject to the Texas franchise tax. If your company has annual receipts under $2,470,000, you will qualify for “no tax due” status and will not be required to pay the tax for that year.
Even if a business does not operate within the state, it must still pay the tax if it has been formed in Texas or is registered there. Companies that partner with out-of-state businesses may also be subject to the same rate.
The Texas Comptroller’s site lays out a detailed list of entities subject to the franchise tax:
As of 2008, the Texas franchise tax is calculated from an entity’s margin. Margin is computed in one of the following ways (unless filing with EZ computation):
(Revenue is calculated by subtracting statutory exclusions from the revenue reported on your company’s federal income tax return.)
That number is then taxed accordingly (for 2024 and 2025):
| No Tax Due Threshold | $2,470,000 |
| Tax Rate (retail or wholesale) | 0.375% |
| Tax Rate (other than retail or wholesale) | 0.75% |
| Compensation Deduction Limit | $450,000 |
| EZ Computation Total Revenue Threshold | $20 million |
| EZ Computation Rate | 0.331% |
The due date for the Texas Franchise Tax is May 15th, though an extension is possible if certain conditions are met. For businesses that owe the no-tax-due surcharge, the due date is April 15th. Companies registered after mid-February will be assessed a 5% late fee penalty on top of their total charge sales tax bill.
It's important to note that filing an extension will not waive any of the fees associated with late payments, so it's always best to pay on time or file for an extension as soon as possible.
Additionally, businesses should consider the processing time required by the state when estimating their due date, as this could result in late payment penalties being assessed even if the industry is filing on time. It’s best to plan and submit your taxes before the due date to avoid unnecessary last-minute hassles.
Certain businesses may qualify for exemptions from the Texas Franchise Tax. The following are listed by the Texas Comptroller of Public Accounts:
It's important to note that these exemptions may not apply in all circumstances, so businesses should consult with their accountant or the Texas Comptroller of Public Accounts before filing for any exemptions. Additionally, even if granted an exemption, companies may still be liable for other taxes or fees, such as the no-tax-due surcharge mentioned earlier.
The Texas Franchise Tax carries significant penalties for noncompliance, including interest and fines. The amount will depend on the severity of the violation, but they can be quite substantial in some cases. Additionally, businesses may also face criminal prosecution if their failure to comply is found to have been intentional or willful.
To avoid this outcome, you should file their taxes correctly and on time each year. This includes understanding any applicable exemptions and taking advantage of them when possible. By doing so, you can ensure you comply with the Texas Franchise Tax regulations.
Complying with the Texas Franchise Tax can be a lot of work, but it is worth it in the long run. Here are the key benefits of maintaining compliance with the Texas Franchise Tax regulations:
Maintaining compliance with the Texas Franchise Tax can help you avoid costly fines and penalties, as long-term noncompliance could lead to serious legal issues. In addition to incurring steep penalties and interest charges, companies may even face criminal prosecution in some cases.
For example, intentionally failing to file the correct sales tax rate or providing false information on a sales tax calculator can result in significant penalties and potentially even jail time. You should definitely strive to comply with the Texas Franchise Tax regulations each year to avoid these harsh consequences.
Compliance with the Texas Franchise Tax may help you reduce your tax liability. Companies can lower their taxes and maximize their financial savings by understanding applicable exemptions and taking advantage of them when possible. For example, businesses in certain enterprise zones may be eligible for sales taxes exemption on certain equipment or inventory.
Additionally, qualified enterprises that generate over $1 million in annual revenue may be able to receive a franchise tax credit for creating or expanding operations within Texas. These opportunities can help you lower your overall tax liability and maximize profits. Understanding all the available exemptions is key for companies looking to reduce your Texas Franchise Tax burden.
The Texas Comptroller of Public Accounts provides a wealth of resources for businesses seeking to comply with the Texas Franchise Tax. The agency offers detailed information on filing and payment procedures and useful calculators to help companies determine their tax liability. You can also find helpful guidelines on filing requirements, exemptions, credits, and other important topics.
The Texas Comptroller of Public Accounts also offers a toll-free hotline for businesses to call and get answers to their franchise tax questions. Taking advantage of these resources can help ensure you comply with the Texas Franchise Tax regulations.
Texas offers qualified businesses several tax credits and exemptions that can help reduce your overall tax liability. For example, some companies may be eligible for an exemption from the franchise tax if they meet certain conditions related to gross receipts or total assets. Understanding and taking advantage of these provisions can significantly reduce the sales tax returns a business owes. Additionally, the state offers tax credits to businesses that use renewable energy sources or hire veterans, which can further reduce company taxes.
The Texas Franchise Tax can be a complex area to navigate, even for businesses with experience in tax compliance. Some of the common challenges faced by companies when dealing with the franchise tax include:
The Texas Franchise Tax rules and regulations are subject to frequent changes. You should stay on top of any new developments and adjust your compliance accordingly. The Comptroller of Public Accounts updates information regularly online, providing the latest news about tax policy in Texas. Staying informed is essential for any leader looking to reduce tax liability and optimize profits in the state.
When navigating the complexities of the Texas Franchise Tax, seeking professional advice from a qualified tax adviser or accountant can be useful. With expertise in the field, a trusted professional can help you understand filing requirements and exemptions and calculate your tax liability. Professional advisors can also help you navigate the rules and regulations surrounding the Texas Franchise Tax, ensuring that you comply with state laws.
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