Texas, known for its business-friendly environment, takes a different approach to taxation compared to many other states. While Texas does not impose a personal income tax, it enforces a state franchise tax that applies to most business entities. Understanding how this tax works is critical for businesses that are formed, organized, or doing business in Texas.
This blog explores the framework of Texas franchise tax, including the entities subject to the tax, the rates and thresholds for 2024–2025, compliance requirements, penalties for late filing, and extension rules. By breaking down each aspect clearly, businesses can prepare for their obligations and avoid unnecessary penalties.
Franchise Tax
The franchise tax is a privilege tax, meaning it is charged for the privilege of doing business in Texas. It applies to most legal entities, whether formed in Texas or operating in the state.
Entities subject to tax include:
- Corporations
- Limited Liability Companies (LLCs), including single-member and series LLCs
- Banks and state limited banking associations
- Savings and loan associations
- S corporations
- Professional corporations
- General and limited partnerships
- Business trusts and professional associations
- Joint ventures and other legal entities
Entities not subject to tax:
- Sole proprietorships (other than single-member LLCs)
- General partnerships composed entirely of natural persons (except limited liability partnerships)
- Certain trusts and nonprofit organizations
This distinction ensures that nearly all structured entities fall within the franchise tax net, with only a few exceptions for traditional sole proprietorships and specific partnerships.
The franchise tax calculation is based on thresholds, rates, and deduction limits set by the state. For 2024 and 2025, the rules are as follows:
- No Tax Due Threshold: Entities with annual revenue up to USD 2,470,000 owe no tax.
- Tax Rate (Retail or Wholesale): 0.375% of taxable margin.
- Tax Rate (Other than Retail or Wholesale): 0.75% of taxable margin.
- Compensation Deduction Limit: USD 450,000.
- EZ Computation Threshold: Entities with USD 20 million or less in annual revenue may opt for the EZ Computation Report (Form 05-169).
- EZ Computation Rate: 0.331%.
The EZ Computation method simplifies reporting for smaller entities, though it comes with limitations. Businesses using this method cannot take credits or deductions, nor can they apply current or future business loss carryforwards.
This tiered system provides flexibility for small and medium-sized businesses, while ensuring larger entities contribute proportionally to state revenue.
Penalties and Interest:
- A USD 50 penalty applies for late filing, regardless of whether any tax is owed.
- Late tax payments incur a 5% penalty if unpaid by the due date. If unpaid after 30 days, an additional 5% penalty is added.
- Interest begins accruing 60 days after the due date. The interest rate is the prime rate plus 1%, meaning it fluctuates with economic conditions.
These penalties underline the importance of timely filing and payment, even for businesses that owe little or no tax.
Texas allows extensions of time to file the annual report, but these come with specific payment requirements.
Extension of Time to File:
- Taxpayers may request an extension if they cannot file on time.
- The extension payment must be at least 90% of the estimated tax due for the current year, or 100% of the prior year’s tax due.
- Rules differ for EFT (Electronic Fund Transfer) payors. Businesses that paid USD 10,000 or more in franchise taxes in the prior state fiscal year qualify as EFT payors.
Extended Deadlines:
- EFT payors: First extension moves the due date from May 15 to August 15. A second extension may be requested by paying electronically before August 15, further extending the due date to November 15.
- Non-EFT payors: Once an extension is granted, the due date is November 15.
Minimum Franchise Tax:
Unlike some states, Texas does not impose a minimum franchise tax. However:
- Entities with less than USD 1,000 in tax due are exempt.
- Entities with annual revenue at or below the no tax due threshold of USD 2,470,000 are required to file a No Tax Due Report (Form 05-163), but they do not pay franchise tax.
This makes Texas attractive for small businesses, while still requiring compliance through reporting.
Conclusion
Texas’ tax structure is designed to balance simplicity with compliance. The franchise tax applies broadly to most business entities but spares very small businesses through its no tax due threshold. For larger businesses, the rates and thresholds ensure that contributions are proportional, while the EZ Computation method offers a simpler path for mid-sized entities.
The penalties for late filing and payment highlight the state’s strict approach to compliance, but the absence of a minimum tax makes Texas a relatively favorable environment for startups and growing companies. By staying aware of deadlines, choosing the correct reporting method, and planning around thresholds, businesses can manage their tax obligations smoothly in Texas.
