Texas Franchise Tax 2026: Who Actually Owes It?

Texas has no state income tax, which leads a lot of new business owners to assume they owe the state nothing. Then a notice arrives about the franchise tax. The good news is that most small businesses owe zero franchise tax. The trap is that owing zero and filing nothing are not the same thing, and the penalty for confusing them is entirely avoidable.

What the franchise tax actually is

The Texas franchise tax is a privilege tax — the cost of the legal privilege of doing business in Texas as a registered entity. It is not an income tax, and it is not calculated on profit. That distinction matters, because a business can have a loss for the year and still owe franchise tax if its revenue is high enough.

It is administered by the Texas Comptroller of Public Accounts, separately from anything you file with the IRS.

Who owes it — and who doesn't

Generally subject to it: LLCs (including single-member LLCs), corporations, S-corporations, professional associations, PLLCs, limited partnerships, and most other entities registered with the state.

Generally not subject to it: sole proprietorships, and general partnerships owned directly by natural persons. Certain passive entities and some non-profits also fall outside it.

This catches people out after they incorporate. Running as a sole proprietor, you had no franchise tax obligation. Form an LLC for liability protection — often on good advice — and you have acquired an annual filing obligation even though nothing about the day-to-day business changed. If you're weighing that decision, our guide to LLC versus S-corp in Texas covers the tax side.

The threshold: $2,650,000 for 2026

If your annualised total revenue is at or below $2,650,000, you owe no franchise tax for the 2026 report year. The threshold is adjusted for inflation every two years; it was $2,470,000 for the 2024 and 2025 report years.

Two details worth getting right:

• "Annualised" matters if your accounting period isn't a full 12 months. A business that traded for six months and made $1.5 million annualises to $3 million — over the threshold.
• "Total revenue" is revenue, not profit. It starts from the gross receipts reported on your federal return, with specific statutory exclusions.

The part people miss: you still have to file

Being under the threshold removes the tax, not the filing. For the 2026 report year, an entity at or below the threshold still files a Public Information Report (for corporations and LLCs) or an Ownership Information Report (for most other entity types).

Skipping it is how an otherwise compliant business ends up with penalties, and eventually with its right to transact business in Texas forfeited. That can surface at the worst possible moment — a closing, a loan application, a contract signature — when someone runs a status check and finds the entity is not in good standing.

If you are over the threshold

The tax applies to your taxable margin, not your revenue. You calculate margin as total revenue minus the greatest of these:

• 30% of total revenue,
• cost of goods sold, or
• compensation.

You take whichever gives the largest deduction — a labour-heavy service business usually lands on compensation, a product business on cost of goods sold. The resulting margin is then apportioned to Texas and taxed at 0.375% for retail and wholesale businesses or 0.75% for everyone else.

There is also an E-Z computation available to smaller filers, which trades a lower rate for giving up those deductions. Which route costs less is an arithmetic question, and it is worth actually running both rather than defaulting to one.

Deadlines and what to do now

Annual reports are due May 15. If the 15th is a weekend or holiday, it moves to the next business day. Extensions are available but they extend the filing date, not the payment date — interest still accrues on tax paid late.

A short checklist:

• Confirm your entity type and whether it is subject to the tax at all.
• Work out annualised total revenue and compare it against $2,650,000.
• Under it? Calendar the Public Information or Ownership Information Report anyway.
• Over it? Run both margin methods and the E-Z computation before choosing.
• Check your entity's standing with the Comptroller if you have ever missed a year.

Franchise tax sits alongside your federal obligations, not instead of them. If quarterly federal payments are also in play, our 2026 estimated tax calculator and tax filing and advisory service cover that side.

Frequently Asked Questions

Sources: Texas Comptroller of Public Accounts, Franchise Tax (rates, thresholds, and deduction limits), retrieved 2026-07-30, comptroller.texas.gov; Texas Comptroller of Public Accounts, Franchise Tax Reports and Public Information Report requirements, retrieved 2026-07-30, comptroller.texas.gov. This article is general information, not individualized tax advice.