What You Need to Know About Texas Franchise Tax

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Executive Summary

  • Texas Franchise Tax is imposed on all business entities (LLC’s, Partnerships, Corporations) doing business in Texas.
  • It is due on May 15 of each year. There is no estimated payment requirement, so all tax due is paid on that date.
  • No tax is due if an entity has less than $1,130,000 in annual revenues.
  • Entities have 4, possibly 5, different ways to compute their Texas Franchise Tax liability.

Texas Franchise Tax is confusing, to say the least, but it is what it is and you have to file and pay it if you do business in Texas.

Who is liable for Texas Franchise Tax?

Applies to all business entities doing business in Texas with greater than $1,130,000 in Revenue. (Including LLC’s (single-member and other), Partnerships, and Corporations. Not applicable to sole proprietorships.)

Entities with less than $1,130,000 in revenues still must file a No Tax Due report, which includes your Public Information Report.

How do I File?

Information for filing online is available on the Texas Comptroller’s website here. The return is due May 15 and is extendable to November 15. (August 15 for entities that owe more than $10,000.)

The extension does not extend your time to pay. You must pay 100% of the prior year’s tax or 90% of this year’s tax to avoid a penalty.

Texas Franchise Tax does not have an estimated payment requirement, so all tax is due on the May 15.

How is the Texas Franchise Tax Computed?

Here is where it gets complicated. Unlike most state income taxes that start with your Federal taxable income and add or subtract some adjustments, Texas did its own thing. Not only that, they give you four different ways to compute your taxable margin. Five if you have less then $20 million in revenues. You select the one that gives you the lowest tax.

70% Revenue. Revenue includes all revenues, interest, dividends, and other gains and losses.

Revenue less COGS. Beware, Texas does not use the same definition of Cost of Goods Sold as the IRS does. In Texas, for example, it includes the includes the costs and labor of producing product. It does NOT include selling costs, outbound freight, officer’s compensation.

Revenue less Compensation. Compensation includes employee benefits. It does NOT include employer taxes, and does not include any 1099 employees. Compensation is limited to $370,000 per person.

Revenue less $1 million. This method is clearly one of the easiest.

Once you have computed your taxable margin from the above computations and selected the lowest, multiple the margin by 0.375% for retail / wholesale businesses, 0.75% for all others.

EZ Computation. This option is only available to entities with less than $20 million in annual revenue. It uses a different franchise tax rate and is computed as Revenue x .331%.

The best place for more detailed information about any of the above computations is the instructions from the Texas Comptroller’s website.

Don’t let the computations overwhelm you. Most importantly, consider using an advisor or accountant to help you manage this as well as all your tax filing needs. These activities don’t usually grow your business and that’s where you are needed.