taxes

Franchise Tax Overview

This information applies to reports originally due on or after Jan. 1, 2008, unless otherwise noted.

Entities Subject to Franchise Tax

Each taxable entity formed in Texas or doing business in Texas must file and pay franchise tax. These entities include:

• corporations;
• limited liability companies (LLCs), including single member LLCs (SMLLCs) and series LLCs;
• banks;
• state limited banking associations;
• savings and loan associations;
• S corporations;
• professional corporations;
• partnerships (general, limited and limited liability);
• trusts;
• professional associations;
• business associations;
• joint ventures; and
• other legal entities.

See Franchise Tax Rule 3.586 for a list of some activities considered to be “doing business in Texas.”

Entities Not Subject to Franchise Tax

The following entities do not file or pay franchise tax:

• sole proprietorships (except for single member LLCs);
• general partnerships when direct ownership is composed entirely of natural persons (except for limited liability partnerships);
• entities exempt under Tax Code Chapter 171, Subchapter B;
• certain unincorporated passive entities;
• certain grantor trusts, estates of natural persons and escrows;
• real estate mortgage investment conduits and certain qualified real estate investment trusts;
• a nonprofit self-insurance trust created under Insurance Code Chapter 2212;
• a trust qualified under Internal Revenue Code Section 401(a);
• a trust exempt under Internal Revenue Code Section 501(c)(9); or
• unincorporated political committees.

Calculation of Taxable Margin

Margin

Franchise tax is based on a taxable entity’s margin. Unless a taxable entity qualifies and chooses to file using the EZ computation, the tax base is the taxable entity’s margin and is computed in one of the following ways:

• total revenue times 70 percent;
• total revenue minus cost of goods sold (COGS);
• total revenue minus compensation; or
• total revenue minus $1 million (effective Jan. 1, 2014).

Total Revenue

Total revenue is determined from revenue amounts reported for federal income tax minus statutory exclusions.

Exclusions from revenue include the following:

• dividends and interest from federal obligations;
• Schedule C dividends;
• foreign royalties and dividends under Internal Revenue Code Section 78 and Sections 951-964;
• certain flow-through funds; and
• other industry-specific exclusions.

See Tax Code Section 171.1011 and Rule 3.587 for more information about total revenue.

Cost of Goods Sold

Cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and real property. Taxable entities that only sell services or intangibles will not generally have allowable costs; however there are exceptions for certain industries.

See Tax Code Section 171.1012 and Rule 3.588 for more information about cost of goods sold.

Compensation

The compensation deduction includes the following:

• W-2 wages and cash compensation paid to officers, directors, owners, partners and employees (including net distributive income to natural persons) for the 12-month period upon which the tax is based, subject to the inflation-adjusted per person wage and cash compensation limitation; and
• benefits provided to all personnel such as workers’ compensation, health care and retirement benefits, to the extent deductible for federal income tax purposes.

Compensation does not include 1099 labor or payroll taxes paid by the employer.

See Tax Code Section 171.1013 and Rule 3.589 for more information about compensation.

Apportionment

Margin is apportioned to Texas using a single-factor apportionment formula based on gross receipts.

See Tax Code Section 171.106 and Rule 3.591 for more information about apportionment.

Available Credits

The following franchise tax credits are available:

• Temporary Credit for Business Loss Carryforwards under Texas Tax Code Section 171.111 (effective for reports originally due on or after Jan. 1, 2008)
• Research and Development Activities Credit under Texas Tax Code Chapter 171, Subchapter M (effective for reports originally due on or after Jan. 1, 2014)
• Certified Historic Structures Rehabilitation Credit under Texas Tax Code Chapter 172 (effective for reports originally due on or after Jan. 1, 2015)

Combined Reporting

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. Members of a combined group must use the same method to compute margin.

See Tax Code Section 171.1014 and Rule 3.590 for more information on combined reporting.

Franchise Tax Reports and Information Reports

Historically, each taxable entity was required to file a Franchise Tax Report (No Tax Due, EZ Computation or Long Form) and an Information Report (Public Information Report or Ownership Information Report). However, effective for reports due in 2024, taxable entities with total revenue at or below the no tax due threshold are no longer required to file a Franchise Tax Report but must continue to file an information report each year.

Franchise Tax Rates, No Tax Due Thresholds and Compensation Deduction Limits

See Tax Rates, Threshold, and Deduction Limits for information on current and historic tax rate, threshold, and deduction limit information.

Due Dates, Extensions and Filing Methods

Franchise tax reports are due on May 15 each year. If May 15 falls on a Saturday, Sunday or legal holiday, the next business day becomes the due date.

The Comptroller’s office will tentatively grant an extension of time to file a franchise tax report upon timely receipt of the appropriate form. Timely means the request is received or postmarked on or before the due date of the original report. See Franchise Tax Extensions of Time to File for more information.

You can file your franchise tax report, or request an extension of time to file, online.

There is a $50 penalty for a franchise tax report filed after the due date, even if no tax is due with that report and even if the taxpayer subsequently files the report.

Questions?

Visit our website for more information about the franchise tax, including answers to frequently asked questions.

Disclaimer

This publication is intended as a general guide and not as a comprehensive resource on the subjects covered. It is not a substitute for legal advice.

98-806
(12/2023)