Chapter 6: Franchise Tax Explained

Franchise tax is a privilege tax — a fee for the right to operate as a legal entity in Texas — rather than a tax on profit. It applies to LLCs, corporations, limited partnerships, professional associations, and business trusts formed or doing business in Texas, including single-member LLCs. Sole proprietorships and general partnerships owned entirely by individuals are exempt, but almost every foreign-owned business chooses an LLC or corporation for liability protection, which puts them squarely inside this requirement.

The No-Tax-Due Threshold

For the 2026 and 2027 report years, if your annualized total revenue is $2,650,000 or less, you owe zero franchise tax. This threshold adjusts every two years for inflation.

If You're Above the Threshold

Above $2,650,000 in annualized revenue, tax is calculated on your taxable margin — the lowest of several statutory methods — using these current rates:

Business type	Rate
Retail or wholesale businesses	0.375%
Most other businesses	0.75%
EZ Computation (simplified, revenue ≤ $20 million)	0.331%

The EZ Computation method is simpler but doesn't allow the deductions available under the standard method — it can be cheaper or more expensive depending on your cost structure, so compare both before your first filing.

Filing Basics

• Due date: May 15 each year for calendar-year filers.
• Where: the Texas Comptroller's Webfile system, using your 11-digit Texas taxpayer number.
• Getting your taxpayer number: the Comptroller assigns this number automatically when you first register your business, typically through the Texas Online Tax Registration Application at comptroller.texas.gov (or by filing paper Form AP-201/AP-114). You'll generally register shortly after forming your entity with the Texas Secretary of State, and you'll need your EIN and formation details on hand. If you've already registered but misplaced the number, the Comptroller's office can look it up by phone at 800-252-1381, or you can use the search tool on their site.
• Late penalty: $50 flat, plus 5% of tax due if paid 1–30 days late, 10% if paid more than 30 days late.

Starting with reports due in 2026, Texas calculates total revenue using figures from your current-year federal tax return, replacing the older fixed reference point the state used for years. If your preparer's process hasn't been updated, this is worth double-checking.

Common Mistakes to Avoid

1. Assuming "no income tax" means no state tax obligation at all. It doesn't — franchise tax is separate and still applies.
2. Not filing because you owe zero. The information report is still required below the threshold; the $50 penalty is easy to avoid and easy to trigger by accident.
3. Ignoring the filing after forming an LLC for a small property or holding company. Foreign owners sometimes form a Texas LLC to hold real estate and assume there's "nothing to report" since there's no income yet. The obligation exists regardless.
4. Picking EZ Computation without comparing it to the standard method. It's simpler, not automatically cheaper.
5. Using outdated thresholds or rates from an old article, template, or advisor. These figures adjust periodically — always confirm against the Texas Comptroller's site before filing.

Bottom Line

Franchise tax isn't dangerous if you know it exists. It becomes expensive only through silence — not knowing you had to file, not knowing your entity type mattered, or not knowing the threshold changed. Build the annual filing into your compliance calendar (Chapter 15 covers it) from day one, and it becomes a routine task rather than a surprise.

This chapter is educational and reflects Texas franchise tax rules as of 2026. Rates and thresholds change periodically. Always confirm current requirements with the Texas Comptroller of Public Accounts (comptroller.texas.gov) or a licensed Texas CPA before filing. This is not legal, tax, or immigration advice.

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