The Texas Franchise Tax Decoded: A Must-read for Every Entrepreneur

Texas Margin Tax

What is the Texas Franchise Tax?

Definition and Basics

Texas franchise tax is a privilege tax imposed on corporations, including banking corporations and limited liability companies that are chartered in Texas. Also, it applies to non-Texas corporations that do business within the state. This tax is not a direct income tax but rather a margin tax based on certain revenue parameters.

Who is Subject to the Tax?

All entities that are registered with the Texas Secretary of State and conduct business in Texas are subject to the franchise tax. This includes partnerships, corporations, LLCs, and other business entities.

How Texas Franchise Tax Works

Calculation of Texas Franchise Tax


The tax is calculated based on the “taxable margin,” which is the smallest of three calculations: total revenue minus cost of goods sold, total revenue minus compensation, or 70% of total revenue.


The franchise tax rate varies depending on the type of business. As of my knowledge cutoff in September 2021, for most entities, the rate is 0.75% for taxable margins over $1 million, and for retailers and wholesalers, the rate is 0.375%.

Filing the Tax

Businesses must file the franchise tax report and make payments annually. The due date typically falls on May 15th.

Exemptions and Discounts

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Eligibility for Exemptions

Certain organizations, such as those involved in charitable activities, religious and educational functions, are exempt from the Texas franchise tax.

Available Discounts

Small businesses may qualify for a discount on their franchise tax if their total revenue falls below a certain threshold.

Impact on Businesses


The Texas franchise tax’s margin-based system can be beneficial for businesses with slim profit margins since the tax is not based on net income.


However, it can be complex to calculate and file, and businesses with high revenue but low profit margins may end up with a substantial tax bill.

How to Navigate the Texas Franchise Tax

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Professional Assistance

Working with a tax professional or a CPA can help businesses navigate the intricacies of the Texas franchise tax.

Staying Updated

Keeping abreast with changes in the tax laws and regulations can also help businesses plan and mitigate their tax liabilities.


Understanding the Texas franchise tax can be a daunting task given its complexity and the potential impact on your business’s bottom line. However, with a solid grasp of its workings, exemptions, and potential impact, businesses can effectively navigate this critical aspect of their financial landscape.

In this intricate world of taxation, professional assistance can be invaluable. SAS Tax & Business offers tailored services to help businesses comprehend and handle their franchise tax obligations in Texas. Their team of experienced tax professionals stays updated with the ever-changing tax laws and regulations, ensuring your business remains compliant while optimizing tax liabilities.

From helping you calculate your taxable margin to filing your annual franchise tax report, SAS Tax & Business can guide your company every step of the way. By partnering with SAS Tax & Business, you can focus on what you do best – running your business, while they take care of your Texas franchise tax needs.

Remember, understanding the Texas franchise tax is not just about compliance; it’s about making strategic decisions that could significantly impact your business’s financial health. With the right guidance and support, you can turn this often-overlooked aspect into a stepping stone for your business’s success in the Lone Star State.

Texas Franchise Tax FAQ

What is the franchise tax in Texas?

The franchise tax in Texas is a state tax levied on businesses for the privilege of doing business in the state. It is based on the taxable entity’s margin, which is calculated using either total revenue or a combination of total revenue and cost of goods sold or compensation.

What is the annual franchise tax for an LLC in Texas?

The annual franchise tax for an LLC in Texas is calculated based on the entity’s margin. The tax rate is 0.75% for most businesses and 0.375% for qualifying wholesalers and retailers. The minimum tax is $100.

Who is exempt from Texas franchise tax?

Certain organizations are exempt from Texas franchise tax, including nonprofit organizations, sole proprietorships, general partnerships with only natural persons as partners, and passive entities.

Is Texas franchise tax the same as sales tax?

No, Texas franchise tax is not the same as sales tax. Franchise tax is a tax on businesses for operating in the state, while sales tax is a tax on the sale of goods and services.

Do all LLCs in Texas pay franchise tax?

Not all LLCs in Texas pay franchise tax. Some may be exempt, such as passive entities or those with total revenue below the no-tax-due threshold.

What happens if you don’t pay franchise tax in Texas?

Failure to pay franchise tax in Texas can result in penalties, interest, and even forfeiture of the right to do business in the state.

Do foreign entities pay franchise tax in Texas?

Yes, foreign entities that do business in Texas are subject to the franchise tax.

Do sole proprietors pay Texas franchise tax?

No, sole proprietors are exempt from Texas franchise tax.

Does Texas have a minimum franchise tax?

Yes, the minimum franchise tax in Texas is $100.

What is the Texas franchise tax threshold for 2023?

The Texas franchise tax no-tax-due threshold for 2023 is $1,180,000.

Do you need to file a final Texas franchise tax return?

Yes, if you are closing your business or terminating your taxable entity, you need to file a final Texas franchise tax return.

What is a passive entity for Texas franchise tax?

A passive entity for Texas franchise tax is an entity that meets specific criteria, such as deriving at least 90% of its federal gross income from passive sources and having no more than 10% of its income from operating a trade or business.

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