Summary of What This Blog Covers:
- Clarifies What Texas Franchise Tax Is and Who It Affects
Explains that franchise tax is a “privilege tax” applied to most registered businesses in Texas—including LLCs, corporations, and multi-state startups—and highlights which business entities are exempt. - Breaks Down How Franchise Tax Is Calculated and When It’s Due
Walks through the taxable margin calculation methods, applicable tax rates, and outlines key filing deadlines, including the annual May 15 due date and the importance of the No Tax Due report. - Outlines Compliance Requirements for In-State and Out-of-State Businesses
Details how businesses with Texas nexus—such as having employees, inventory, or significant sales—must file, even if they’re formed in another state, and explains apportionment and reporting requirements. - Provides Strategic Tips to Stay Compliant and Avoid Penalties
Offers practical guidance on using tools like QuickBooks and ZohoBooks, tracking revenue thresholds, coordinating with federal forms like 1065 and 1120, and working with a CPA firm in Austin to ensure accuracy and avoid costly mistakes.
Let’s be honest. Starting a business in Texas is exciting, rewarding, and fast-paced. Between launching your product, pitching investors, and building a team, you’ve got your hands full. Taxes? They’re usually the last thing on your mind until they become a problem.
And when it comes to Texas-specific tax requirements, franchise tax tends to catch business owners off guard. Contrary to its name, franchise tax isn’t just for fast-food chains or licensed business models. It applies to most registered business entities operating in the state, even small startups.
At Insogna CPA, we’ve guided hundreds of business owners across Austin, Round Rock, and beyond through franchise tax compliance. Whether you’re operating as an LLC, S corporation, or multi-state partnership, this guide will walk you through what Texas franchise tax is, who needs to file, how it’s calculated, common mistakes to avoid, and why compliance is critical to your business success.
What Is Texas Franchise Tax, Really?
Texas franchise tax is a “privilege tax”. A required payment for the privilege of doing business in the state. It’s administered by the Texas Comptroller of Public Accounts, and every eligible entity must file a report annually, whether or not tax is owed.
Unlike federal income tax, franchise tax is based on a business’s taxable margin, not its net income. This means even businesses that aren’t yet profitable may still have a filing obligation.
Who Must File:
- Texas-based LLCs (single- and multi-member)
- C corporations and S corporations
- Limited partnerships (LPs) and limited liability partnerships (LLPs)
- Professional associations
- Business trusts
- Out-of-state businesses with economic nexus in Texas
Who’s Exempt:
- Sole proprietorships
- General partnerships with no liability protection
- Certain nonprofits (though many still have to file an information report)
If you’ve registered an entity in Texas (whether or not it’s generating significant revenue), you likely need to file a franchise tax report annually.
How Is Franchise Tax Calculated?
The franchise tax formula is unique and somewhat flexible. It’s based on your business’s taxable margin, which you can calculate in one of four ways:
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation (payroll, benefits, etc.)
- Total revenue times 70%
- Total revenue minus $1 million (EZ computation method for eligible businesses)
Once your margin is calculated, you apply the applicable rate:
- 75% for most business types
- 375% for retailers and wholesalers
- 0% if your total revenue is below the no-tax-due threshold
No-Tax-Due Threshold (2024):
If your total annual revenue is less than $1.23 million, you’re not required to pay franchise tax. However, you still have to file a “No Tax Due” report. Failing to do so can result in penalties and possible forfeiture of your entity’s status.
Does Franchise Tax Apply to Startups?
Absolutely. In fact, it applies to the majority of startups registered as legal entities in Texas, even if they’re not yet profitable or generating substantial revenue.
Key Scenarios:
- You’ve formed a Texas LLC to protect your personal liability but haven’t launched yet. You still have to file.
- You’re a bootstrapped tech startup with $200,000 in early revenue. No tax is due, but the No Tax Due Report must be filed.
- You operate a multi-state business and have Texas clients. If your revenue from Texas exceeds $500,000 or you have employees, inventory, or a physical presence in the state, you likely have nexus and must file.
Don’t let the simplicity of your operation fool you into thinking franchise tax doesn’t apply. It does and the state of Texas doesn’t accept “I didn’t know” as a defense.
What If You’re Out of State but Selling into Texas?
Texas enforces economic nexus rules. This means that even if your company is formed in another state (Delaware, Wyoming, or anywhere else), you must still comply with Texas franchise tax requirements if you:
- Have remote employees working in Texas
- Store inventory or lease office space in Texas
- Earn over $500,000 in annual gross receipts from customers based in Texas
- Own or lease property located in Texas
Out-of-state companies must register with the Texas Comptroller, calculate taxable margin from Texas revenue, and file the appropriate franchise tax return and Public Information Report.
This scenario is especially common for eCommerce businesses, online service providers, and SaaS companies. We often help founders apportion multi-state revenue to ensure they remain compliant without overpaying.
What Happens If You Don’t File?
Non-compliance comes with real consequences.
Penalties for Late Filing:
- 5% penalty on tax not paid by the due date (within 30 days)
- 10% penalty if payment is more than 30 days late
- Daily accruing interest
- Potential revocation of your right to transact business in Texas
Additionally, failure to file the Public Information Report can result in your entity being marked as forfeited. Once that happens, banks may freeze accounts, contracts can become unenforceable, and your business loses its limited liability protection.
Important Franchise Tax Deadlines to Know
- May 15 – Annual Franchise Tax Report and payment due
- November 15 – Extended due date (only if a valid extension was filed)
- One-year anniversary of formation – New businesses must file an Initial Franchise Tax Report and Public Information Report
Note: Even if you’re under the no-tax-due threshold, the annual report must still be submitted by May 15 to avoid penalties.
Working with a certified CPA or chartered public accountant helps ensure these deadlines don’t slip through the cracks.
Let’s Look at Two Startup Examples
Example 1: Texas-Based Startup Under the Revenue Threshold
- Entity: Single-member LLC
- Location: Austin, Texas
- Revenue: $600,000
Because total revenue is below the $1.23 million threshold, no tax is owed but the business must file a No Tax Due report. We handle this seamlessly as part of our annual filing package.
Example 2: Multi-State eCommerce Seller
- Entity: Delaware C corporation
- Texas Sales: $700,000 (25% of total revenue)
Because this business has economic nexus in Texas, they must register with the state, apportion revenue for franchise tax purposes, and file both a franchise tax report and Public Information Report.
Our team prepares these filings, leveraging accounting software’s like QuickBooks Online, WaveApps, and ZohoBooks to track Texas-sourced revenue and minimize risk.
What About Federal Tax Forms and Coordination?
Although franchise tax is a state-level tax, coordination with federal tax filings is key. Your business may also be required to file:
- Form 1040 (Schedule C) for sole proprietors
- Form 1065 for partnerships
- Form 1120 or 1120-S for C-corporations and S-corporations
- Form 2553 to elect S-corporation status
- 1099 NEC, 1099 R, 1099 K, and 1095 A/C for contractors and benefits
- FBAR filing if you hold foreign financial accounts
Filing franchise tax correctly ensures your business remains in good standing with the state, which is often required when dealing with banks, lenders, investors, and even contractors who request documentation like your W9 tax form or proof of good standing.
How to Stay Compliant Year-Round
- Track Revenue Accurately
- Use cloud tools like QuickBooks Self-Employed, ZohoBooks, or FreshBooks
- Monitor gross receipts by state to avoid nexus issues
- Keep an Eye on Thresholds
- If your business approaches the $1.23 million threshold, consult a CPA certified public accountant to plan ahead
- Know Your Nexus Exposure
- If you sell into Texas from another state, evaluate whether you need to register and file
- Don’t Rely on TurboTax Free or DIY Software
- These tools often don’t support franchise tax or multi-state compliance. Seek expert help through an Austin CPA firm or bookkeeping services near me
- Use the Texas Comptroller’s WebFile system
- Register, file, and pay online—but only if you know exactly what to enter. One error can trigger costly corrections
- Hire a CPA Who Knows Texas
- Someone who understands state apportionment, form 05-102, and compliance across industries can save you time, stress, and money
Final Thoughts: Make Franchise Tax a Strategic Advantage
Texas franchise tax doesn’t have to be a confusing roadblock. With proactive planning, accurate record-keeping, and expert guidance, it becomes a straightforward process and a crucial part of your growth foundation.
Stop searching for tax preparation services near me, and start building a relationship with a team that truly gets what it means to be in your shoes.
Contact Insogna CPA today for personalized, proactive support. Let’s protect your business, file on time, and build a smarter tax strategy for the long haul.
Franchise tax doesn’t have to be complicated, but it does have to be done right. We’re here to help you do just that.