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Texas Franchise Tax: The Margin Tax, the No-Tax-Due Threshold, the EZ Computation

By The Ledgerism Editorial Team · The Ledgerism Brief Editorial Team produces original, methodology-disclosed accounting and tax research—data trackers, databases, and reference guides built to be the most-cited source in the field. Every figure is verified against primary sources including FASB, the IRS, the PCAOB, NASBA, the AICPA, and state boards of accountancy.

The Texas franchise tax is a tax on the margin a business earns, not on its income or its profit. Most taxable entities owe nothing because revenue falls under the no-tax-due threshold, which is $2,650,000 for reports due in 2026. The entities that do owe pick from four ways to compute their margin and pay one of two rates.

What is the Texas franchise tax?

The Texas franchise tax is the state’s primary tax on business entities. Texas has no personal income tax and no corporate income tax, so the franchise tax is how the state taxes business activity. It is often called the “margin tax” because of how it is calculated: the base is the entity’s taxable margin, a figure derived from total revenue, not the entity’s net profit. The tax is authorized by Chapter 171 of the Texas Tax Code and administered by the Texas Comptroller of Public Accounts.

Because the base is margin rather than income, a business can owe Texas franchise tax in a year it reports a net loss for federal income tax purposes. The tax does not care about profitability; it cares about revenue net of one of several allowed subtractions. That feature surprises new business owners who assume that no profit means no tax. It is one of the structural differences between the Texas margin tax and a conventional corporate income tax, much as the Delaware franchise tax is a capital-based levy rather than an income tax.

The tax applies on a privilege period. A report filed in 2026 generally covers the entity’s accounting year that ended in 2025. Annualizing matters for entities with a short accounting period, because the no-tax-due threshold is tested against annualized total revenue, not the raw period figure.

Who must comply

The franchise tax applies to “taxable entities” doing business in Texas or organized in Texas. That includes corporations, limited liability companies, limited partnerships, professional associations, business trusts, and most other entities that provide liability protection. Several entity types are not taxable entities, most importantly sole proprietorships and certain general partnerships owned entirely by natural persons. Passive entities and certain other categories are also excluded under section 171.0002.

Every taxable entity must file an annual franchise tax report, even if it owes no tax. An entity whose annualized total revenue is at or below the no-tax-due threshold owes zero tax. For reports originally due on or after January 1, 2024, Texas eliminated the separate No Tax Due Report, so a below-threshold entity no longer files that specific form. It must still file the appropriate information report each year: a Public Information Report for corporations, LLCs, and limited partnerships, or an Ownership Information Report for other entity types. Failing to file the information report can lead to forfeiture of the entity’s right to do business in Texas.

An out-of-state entity can be subject to the tax if it has nexus with Texas. Texas applies an economic nexus standard: an entity with $500,000 or more of Texas gross receipts has nexus even without a physical presence, under the Comptroller’s franchise tax nexus rule. New businesses, including those that formed elsewhere but operate in Texas, often first encounter the franchise tax when setting up operations. Founders working through formation choices frequently address it alongside the practical mechanics covered in how to start a CPA firm, and our accounting learning hub collects the related state-tax topics.

Combined reporting adds a wrinkle for related businesses. Texas requires a group of affiliated entities engaged in a “unitary business” to file a single combined franchise tax report, treating the group as one taxable entity for the margin computation. The combined group computes a single total revenue, a single margin, and a single threshold test. This prevents owners from splitting one business across many small entities to keep each below the no-tax-due threshold. The reporting entity files on behalf of the group, and the affiliate list is disclosed with the return.

How it works: the margin computation

The calculation has three layers: determine total revenue, compute taxable margin, then apply the rate after apportionment.

Total revenue starts from specific lines of the entity’s federal income tax return, then adds and subtracts items defined in Texas Tax Code section 171.1011. It is gross, before most deductions. From total revenue, the entity computes its margin as the lowest of four amounts under section 171.101:

First, 70 percent of total revenue. Second, total revenue minus cost of goods sold, where COGS is defined by the Texas-specific rules in section 171.1012, which differ from the federal definition. Third, total revenue minus compensation, where compensation includes wages and benefits subject to a per-person cap of $480,000 for the 2026 report year. Fourth, total revenue minus $1 million (the standard deduction added in 2014). The entity uses whichever of the four produces the smallest margin, because the smallest margin yields the lowest tax.

The chosen margin is then apportioned to Texas using a single-factor gross receipts apportionment: Texas receipts divided by total receipts everywhere. The apportioned margin is the tax base. The rate is 0.375 percent for entities primarily engaged in retail or wholesale trade and 0.75 percent for all other entities. An entity qualifies for the retail or wholesale rate only if more than half its total revenue comes from retail or wholesale activities and it meets the other conditions in section 171.002(c).

The EZ computation is an alternative for smaller entities. An entity with total revenue of $20 million or less may elect to pay 0.331 percent of apportioned total revenue, skipping the COGS, compensation, and margin computations entirely. The EZ rate is higher than the standard rates, but it applies to total revenue rather than margin, so whether it saves tax depends on the entity’s margin profile.

The cost of goods sold rules deserve special caution because Texas wrote its own definition. Section 171.1012 limits COGS to costs of producing or acquiring goods, and “goods” means real or tangible personal property sold in the ordinary course of business. A pure service business that sells no tangible product generally cannot use the COGS subtraction at all, which is why service firms more often land on the compensation method or the 70-percent method. Certain industries, including some construction and film production activities, get special COGS provisions. Because the Texas COGS figure rarely equals the federal Schedule of cost of goods sold, importing the federal number without adjustment is a frequent source of error.

Rates and thresholds for 2026

Worked example

Assume Bluebonnet Tools LLC, a Texas company in the wholesale tool business, has total revenue of $6,000,000 for its 2025 accounting year, all sourced to Texas, filing a 2026 report. Its cost of goods sold under the Texas definition is $4,100,000, and its total compensation (within the $480,000 per-person caps) is $1,500,000.

First, the threshold. Annualized total revenue of $6,000,000 exceeds $2,650,000, so the entity owes tax and cannot file as no-tax-due. Next, compute the four margins. Seventy percent of revenue is $4,200,000. Revenue minus COGS is $6,000,000 minus $4,100,000, or $1,900,000. Revenue minus compensation is $6,000,000 minus $1,500,000, or $4,500,000. Revenue minus $1 million is $5,000,000. The lowest is revenue minus COGS at $1,900,000, so that is the margin.

Because all revenue is Texas-sourced, the apportionment factor is 100 percent, leaving an apportioned margin of $1,900,000. Bluebonnet is primarily a wholesaler, so it qualifies for the 0.375 percent rate. The tax is $1,900,000 multiplied by 0.375 percent, which equals $7,125.

Now compare the EZ option. Total revenue of $6,000,000 is under the $20 million ceiling, so EZ is available: 0.331 percent of $6,000,000 is $19,860. The standard margin computation produces $7,125, far less than the EZ figure of $19,860, so Bluebonnet uses the margin method and pays $7,125. The EZ election would have cost it about $12,700 more, illustrating why a high-COGS wholesaler rarely elects EZ.

Recent changes 2024 to 2026

The most consequential recent change came from House Bill 1, passed in 2023, which roughly doubled the no-tax-due threshold to $2.47 million effective for reports due on or after January 1, 2024. The threshold is then adjusted for inflation; the Comptroller’s published figure for the 2026 report year is $2,650,000. The increase took hundreds of thousands of small businesses off the tax rolls entirely.

The same legislation eliminated the No Tax Due Report for reports originally due on or after January 1, 2024. Entities below the threshold no longer file that form, but they must still file a Public Information Report or Ownership Information Report. This trips up businesses that assume “no tax due” means “nothing to file.”

The rates themselves have held steady: 0.75 percent standard, 0.375 percent for retail and wholesale, and 0.331 percent for the EZ computation. The compensation deduction per-person cap is indexed and is $480,000 for the 2026 report year, per the Comptroller’s biennial inflation adjustment. Filers should always confirm the current year’s threshold and cap against the Comptroller’s published figures, because these amounts move with inflation every two years.

The shift away from the No Tax Due Report has also changed how the Comptroller enforces compliance. Because below-threshold entities now interact with the agency only through the Public Information Report or Ownership Information Report, those information reports have become the trigger for forfeiture actions. An entity that owes no tax but skips its information report can still lose its corporate privileges and its right to sue or defend in Texas courts, and reinstatement requires filing the delinquent reports and paying any penalties. The lesson for 2026 filers is that “no tax due” is a statement about money owed, never a reason to file nothing.

Common pitfalls

• Assuming no profit means no tax. The base is margin, not net income, under Texas Tax Code section 171.101; a money-losing business can still owe franchise tax.
• Not testing all four margin methods. Section 171.101 lets the entity use the lowest of four computations; defaulting to 70 percent of revenue without checking the COGS and compensation methods often overpays.
• Using the federal COGS figure. Texas defines cost of goods sold differently than the Internal Revenue Code in section 171.1012; service businesses in particular may not even qualify to subtract COGS.
• Skipping the information report when below the threshold. Since 2024 there is no No Tax Due Report, but a Public Information Report or Ownership Information Report is still required; missing it can forfeit the entity’s right to do business.
• Claiming the 0.375 percent rate without qualifying. The retail or wholesale rate requires more than half of total revenue from those activities and other conditions in section 171.002(c); using it incorrectly understates the tax.
• Electing the EZ computation when it costs more. The 0.331 percent EZ rate applies to total revenue, not margin, so high-COGS or high-compensation entities usually pay less under the standard method.
• Forgetting to annualize for a short period. The no-tax-due threshold is tested against annualized total revenue; a short-year entity that uses raw revenue can misjudge whether it owes tax.

Frequently asked questions

What is the Texas franchise tax?

A tax on the taxable margin of business entities doing business in Texas, authorized by Chapter 171 of the Texas Tax Code. It is called the margin tax because the base is margin derived from total revenue, not net income.

What is the no-tax-due threshold for 2026?

$2,650,000 of annualized total revenue, per the Texas Comptroller’s published 2026 rates. An entity at or below that level owes no franchise tax but must still file an information report.

How is the margin calculated?

The entity uses the lowest of four amounts under section 171.101: 70 percent of total revenue, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million.

What are the franchise tax rates?

0.375 percent for entities primarily engaged in retail or wholesale trade and 0.75 percent for all other entities. An EZ computation of 0.331 percent on total revenue is available to entities with total revenue of $20 million or less.

Can a business owe franchise tax in a loss year?

Yes. Because the base is margin rather than net income, an entity can owe the tax even when it reports a federal net loss.

Do I still file a No Tax Due Report?

No. For reports originally due on or after January 1, 2024, Texas eliminated the No Tax Due Report. Below-threshold entities instead file a Public Information Report or an Ownership Information Report.

When is the report due?

May 15 each year, per Texas Tax Code section 171.202. Extensions are available, but estimated tax may still be due by the original date.

Does an out-of-state company owe Texas franchise tax?

It can. Texas applies an economic nexus standard under which an entity with $500,000 or more of Texas gross receipts has nexus and a filing obligation even without physical presence in the state.

Should I use the EZ computation?

Only if it produces a lower tax. The 0.331 percent EZ rate applies to total revenue rather than margin, so it usually benefits service businesses with low COGS and low compensation, not high-COGS wholesalers.