One of the great appeals of doing business in Texas is what the state doesn’t charge: there’s no personal income tax. But business owners who assume that means no state-level tax at all are often surprised by a letter from the Comptroller. Texas funds a meaningful share of its budget through the franchise tax—sometimes called the “margin tax”—and nearly every registered business is expected to deal with it each spring, even the many that ultimately owe nothing. Here’s what every owner in Southlake and across the DFW area should understand.
What the Franchise Tax Actually Is
The franchise tax is best thought of as a privilege tax: the price of the legal privilege of doing business as a registered entity in Texas. It applies to each taxable entity that is formed, organized, or simply doing business in the state. Unlike a traditional income tax, it isn’t calculated on profit. Instead it’s based on a figure the state calls your “margin,” which is derived from revenue. That distinction matters, because a business can have a thin or even negative profit year and still owe franchise tax if its revenue is high enough.
Who Owes—and Who Doesn’t
Most formal business structures are subject to the tax, while a couple of simpler arrangements are not. Generally:
- Subject to the tax: corporations, LLCs, limited partnerships, professional associations, S corporations, and most other registered entities.
- Generally not subject: sole proprietorships and general partnerships owned entirely by natural persons (not by other entities).
- Often exempt: certain nonprofits, along with some passive entities and qualifying new veteran-owned businesses—though exemptions have conditions worth confirming.
The Numbers That Matter for 2026
The Comptroller updates the key figures by report year. For the 2026 and 2027 report years, the thresholds and rates are:
2026–2027 Franchise Tax Rates and Thresholds
| Item (2026–2027 report years) | Amount |
|---|---|
| No Tax Due threshold | $2,650,000 |
| Tax rate — retail or wholesale | 0.375% |
| Tax rate — all other businesses | 0.75% |
| EZ Computation revenue ceiling | $20 million |
| EZ Computation rate | 0.331% |
| Compensation deduction limit (per person) | $480,000 |
The single most important number here is the No Tax Due threshold of $2,650,000. If your entity’s annualized total revenue is at or below that amount, you owe no franchise tax—but, as noted below, you may still have a report to file.
How the Tax Is Calculated
For businesses above the threshold, the tax is applied to your taxable margin, apportioned to Texas. Your margin is generally the lowest of four amounts, which is what makes the tax more forgiving than it first appears:
- 70% of total revenue;
- total revenue minus cost of goods sold;
- total revenue minus compensation (wages and benefits, capped per person); or
- total revenue minus $1 million.
That margin is then multiplied by your rate—0.375% for retailers and wholesalers, or 0.75% for everyone else. Smaller businesses with $20 million or less in total revenue may instead elect the simpler EZ Computation, which applies a flat 0.331% rate but gives up deductions and credits. Which path costs less depends on your margins, so it’s worth running both.
Even “No Tax Due” Businesses Usually Must File
This is the trap that catches the most owners. For report years 2024 and later, Texas discontinued the old No Tax Due Report, so businesses under the threshold no longer file that form. But that does not mean you can ignore the deadline. Most entities under the threshold are still required to file a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167) every year. Skipping it—because you assumed “no tax due” meant “nothing to do”—can put your entity out of good standing and jeopardize its right to do business in Texas.
Deadlines, Penalties, and Interest
The annual franchise tax report is due May 15 each year (the next business day if the 15th falls on a weekend or holiday). Missing it gets expensive quickly:
Penalties for Late Filing or Payment
| Situation | Cost |
|---|---|
| Any report filed after the due date | $50 flat penalty |
| Tax paid 1–30 days late | 5% of the tax due |
| Tax paid more than 30 days late | 10% of the tax due |
| Tax still unpaid after 60 days | Interest begins accruing on day 61 |
Beyond the dollar penalties, a business that falls out of compliance can lose its Certificate of Account Status, which is often required to close a sale, secure financing, or wind the company down cleanly. If you need more time, the state does allow you to request an extension—but an extension to file is not an extension to pay.
Don’t Let a Routine Filing Become a Problem
For most Southlake business owners, the franchise tax is less about a large check and more about staying organized and in good standing. The mechanics—tracking revenue, choosing the right report, filing on time even when nothing is owed—are straightforward once they’re part of your annual rhythm, and they tie directly into your broader tax and business planning.
If you own a business and aren’t certain how the franchise tax fits into your overall financial picture—or you’re thinking about a sale, a new entity, or an exit—schedule a 15-minute intro call and we’ll talk it through alongside your CPA.
This article is for informational and educational purposes only and does not constitute tax, legal, or investment advice. Tax rules change and apply differently to each business; figures reflect the Texas Comptroller’s published 2026–2027 report-year amounts as of publication. Please consult a qualified tax professional or the Texas Comptroller of Public Accounts regarding your specific situation before making any decisions.