Guide · Reports for 2026 and 2027
Texas franchise tax in 2026
Texas franchise tax is a margin tax, not an income tax. For reports covering 2026 and 2027, the no-tax-due threshold is $2,650,000 of total revenue, the rate is 0.375% for retail and wholesale and 0.75% for everyone else, and the compensation deduction limit is $480,000 per employee.
The figures the Comptroller publishes
| Item | 2026 and 2027 | 2024 and 2025 |
|---|---|---|
| No Tax Due Threshold | $2,650,000 | $2,470,000 |
| Rate — retail or wholesale | 0.375% | 0.375% |
| Rate — other than retail or wholesale | 0.75% | 0.75% |
| Compensation deduction limit | $480,000 | $450,000 |
| EZ Computation revenue threshold | $20 million | $20 million |
| EZ Computation rate | 0.331% | 0.331% |
The threshold moves because the statute indexes it to inflation and the Legislature has twice raised it outright. The rate has not moved in a decade. If your revenue sits between $2.47 million and $2.65 million, the 2026 report is the first one where you owe nothing.
Step one: are you a taxable entity?
The franchise tax applies to corporations, LLCs, partnerships, joint ventures, trusts, business associations and other legal entities doing business in Texas or holding a Texas certificate or permit. Sole proprietorships and general partnerships owned wholly by natural persons are not taxable entities. Certain passive entities — mostly investment vehicles with limited Texas activity — can file an exemption certificate instead of a report.
Step two: compute the margin
Start with total revenue as reported on the federal return, then test three subtractions and keep the lowest result:
- Total revenue minus cost of goods sold;
- Total revenue minus total compensation (capped at $480,000 per employee);
- 70% of total revenue.
The third test is the floor. A business that cannot document either COGS or compensation pays on 70% of revenue, which is why record-keeping — not the rate — decides most franchise tax disputes. In our calculator the three margins are shown side by side so you can see which one is binding.
Step three: standard or EZ
The EZ computation caps the bill at 0.331% of total revenue and removes COGS and compensation from the calculation entirely. It is available up to $20 million of revenue and it is faster to prepare. It is cheaper only when margin exceeds roughly 44% of revenue at the 0.75% rate. Because the EZ election carries lock-in consequences for later years, the comparison is worth doing explicitly before you file.
Step four: the calendar
- Annual report due: May 15, for the accounting period ending in the prior calendar year.
- Extension: an extension of time to file does not extend the time to pay.
- No Tax Due Report: Form 05-163, still required every year the entity is a taxable entity, even at zero revenue.
- Public information report: filed with the annual report, listing officers and directors.
Common questions
Does the franchise tax apply to an LLC with one member?
Yes. A single-member LLC is treated as a taxable entity for Texas franchise tax unless it qualifies as a passive entity or is disregarded in a way the statute recognises. Revenue below $2.65 million means no tax, not no report.
Is the franchise tax deductible for federal purposes?
It is generally deductible as a state tax paid or accrued, subject to the federal rules that apply to the entity's form — a question for the entity's tax preparer, not for this site.
What happens if revenue crosses the threshold mid-year?
The threshold is tested on total revenue for the accounting period reported, not on a calendar snapshot. A period that ends below $2.65 million owes no tax even if part of the year ran hotter.