Texas Franchise Tax Explained: What Houston Businesses Owe in 2026

Key Takeaways

• The Texas franchise tax is a privilege tax on entities doing business in the state. It is based on your margin, not your profit, so you can owe it even in a break-even year.

• If your total revenue is at or below the no-tax-due threshold of roughly $2.47 million, you owe $0 in tax, but you still have to file an information report by May 15.

• The EZ computation lets businesses with $20 million or less in total revenue pay a flat 0.331% on apportioned revenue and skip the margin math entirely.

• Standard rates are 0.375% for retail and wholesale and 0.75% for everyone else, applied to your taxable margin.

• The filing deadline is May 15 every year. Missing it triggers a $50 penalty plus 5% to 10% of tax due, and can eventually forfeit your right to do business in Texas.

• The most expensive mistake is assuming that owing $0 means filing nothing. Forgetting the Public Information Report is what gets Houston entities into trouble.

What the Texas Franchise Tax Actually Is

Texas does not have a personal income tax, and that surprises a lot of new business owners into thinking the state leaves them alone. It does not. The franchise tax is a privilege tax the state charges most registered entities for the right to do business here. If you formed an LLC, a corporation, an S-corp, a partnership, or a professional association in Texas, the Comptroller expects to hear from you every year, even if you owe nothing.

Here is the part that trips people up. The franchise tax is calculated on your margin, not your net profit. Margin is closer to gross revenue with a few deductions. That means a Houston restaurant or a contractor can have a rough year, show almost no profit on the tax return, and still owe franchise tax because the number the state cares about is revenue-based. Understanding that distinction early saves you from a nasty surprise in May.

Sole proprietors and most general partnerships owned entirely by individuals are the main exceptions. If you never registered a formal entity, you likely fall outside the franchise tax. Everyone else should assume they are in the system until they confirm otherwise.

Do You Even Owe It? The No-Tax-Due Threshold

This is the question that matters most, and for the majority of small Houston businesses the answer is a relief. If your entity's total revenue is at or below the no-tax-due threshold, which sits at roughly $2.47 million for reports due in 2026, your franchise tax bill is $0. The Comptroller adjusts this number for inflation every two years, so confirm the current figure before you rely on it.

Most local businesses live comfortably under that line. A two-truck plumbing company, a single-location dental practice, a family-run retail shop, a small marketing agency. These almost never cross $2.47 million in gross revenue, so they owe no tax. But owing no tax and filing nothing are two very different things, and confusing them is the number one franchise tax error we clean up.

As of 2024, if you are under the threshold you no longer have to file the old No Tax Due Report. You do, however, still have to file the Public Information Report or Ownership Information Report by May 15. Skip that and you have an unfiled return on record even though your tax was zero.

• Under about $2.47M in total revenue: $0 tax owed, but the information report is still required.

• The threshold adjusts every two years for inflation, so verify the exact 2026 number with the Comptroller.

• Total revenue means gross receipts before most expenses, not your profit.

How the Tax Is Calculated When You Do Owe It

Once you cross the threshold, the tax applies to your taxable margin. Texas lets you calculate margin four ways and use whichever is lowest: 70% of total revenue, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million. You then apportion that margin to Texas based on your Texas-sourced gross receipts and apply your rate.

The rate depends on what you do. Retail and wholesale businesses pay 0.375%. Everyone else, including most service businesses, contractors, and professional firms, pays 0.75%. On a $3 million revenue service business with a $2.1 million margin, that is roughly $15,750 in tax. On a retailer with the same numbers, closer to $7,875. The margin method you pick genuinely changes the bill, which is why this is not a form to rush through the night before the deadline.

This is also the point where entity structure starts to matter for the whole tax picture, not just franchise tax. If you are weighing whether should your Houston business be an S-corp, the franchise tax treatment is one input among several, and it rarely tips the decision by itself.

The EZ Computation: When the Shortcut Makes Sense

If your total revenue is $20 million or less, Texas offers a simpler path called the EZ computation. You skip the margin math entirely. Instead you take your total revenue, apportion it to Texas, and apply a flat 0.331% rate. No cost of goods sold analysis, no compensation deduction, no picking among four methods.

The trade-off is that you give up those deductions. For a business with high labor costs or heavy inventory, the standard margin calculation often produces a lower bill because the deductions shrink the taxable base more than the reduced EZ rate does. For a lean service business with few deductible costs, the EZ computation is frequently both cheaper and faster. There is no universal winner, so the honest answer is that you run it both ways and file the lower one.

This is exactly the kind of judgment call where the difference between doing it yourself and paying someone shows up. If you are on the fence about when to hire a Houston CPA versus handling it in software, franchise tax with meaningful revenue is a reasonable line to cross over.

Filing Deadlines and Penalties You Want to Avoid

The annual franchise tax report is due May 15. If May 15 falls on a weekend or holiday, it shifts to the next business day. Your first report as a new entity is due the May 15 of the year after you form, so an entity created in 2025 files its first report in 2026.

Miss the deadline and the penalties stack quickly. You get an automatic $50 late-filing penalty just for being late, separate from any tax. On top of that, tax paid 1 to 30 days late carries a 5% penalty, and tax more than 30 days late carries 10%, with interest accruing after 60 days. Worse, an entity that ignores its franchise tax obligations long enough can have its right to transact business forfeited, which can expose owners to personal liability and freeze your ability to sue or defend in Texas courts.

You can file an extension to November 15 if you need more time, but an extension to file is not an extension to pay. If you expect to owe, you generally need to remit most of the estimated tax by May 15 to avoid penalties. If you are already behind, know that these situations are fixable and how long tax resolution takes depends heavily on the case type.

The Decision: Which Filing Path Fits Your Business

Franchise tax is a decision, not just a form. Almost every Houston entity falls into one of three buckets, and knowing yours tells you exactly what to do before May 15.

• Choose the no-tax-due path if your total revenue is at or below roughly $2.47 million. You owe $0, but you must still file the Public Information Report or Ownership Information Report on time. This covers the large majority of local small businesses.

• Choose the EZ computation if your revenue is above the threshold but at or below $20 million and you are a lean, service-oriented business with few deductible costs. The flat 0.331% rate and simpler math usually beat the long form for you.

• Choose the long-form margin calculation if your revenue is above $20 million, or if you carry significant cost of goods sold or compensation that would drive your taxable margin well below the EZ base. Run the numbers both ways and file whichever produces the lower tax.

Common Mistakes Houston Owners Make

The most common and most damaging mistake is assuming $0 tax means $0 filing. It does not. The information report is still mandatory under the threshold, and forgetting it puts your entity out of good standing even though you never owed a dime.

The second mistake is confusing total revenue with profit. Owners see a break-even year on their income statement and assume no franchise tax, then get blindsided because the state taxes margin. The third is defaulting to one margin method every year without checking whether another would be lower, which quietly overpays the state. The fourth is missing the May 15 date entirely because it does not line up with the April federal deadline.

For our Vietnamese-American clients specifically, we see recurring patterns worth naming plainly. If you want the fuller list of tax filing mistakes I see every year, that breakdown is worth ten minutes. And if your business looks profitable on paper but the bank account says otherwise, that is a separate problem: your business made money but you have no cash and the franchise tax bill is often what finally forces the question.

Frequently Asked Questions

Does my Houston LLC owe Texas franchise tax if it made no profit?

Possibly, because franchise tax is based on your margin, not your profit. Margin starts from total revenue with a limited set of deductions, so a break-even or even a loss year on your income statement does not automatically mean $0 franchise tax. That said, most small Houston LLCs sit below the no-tax-due threshold of roughly $2.47 million in total revenue, and if you are under that line your tax is $0 regardless of profit. The key thing to remember is that owing $0 does not excuse you from filing. You still must submit the Public Information Report by May 15. So the honest answer is: check your total revenue first, then your margin, and never assume a no-profit year means no franchise obligation at all.

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

For reports due in 2026 the no-tax-due threshold sits at roughly $2.47 million in total revenue. If your entity's total revenue is at or below that figure, you owe no franchise tax. The Comptroller adjusts this threshold for inflation every two years, so the exact number can shift, and you should confirm the current figure on the Comptroller's website before relying on it. One important change took effect in 2024: businesses under the threshold no longer file the old No Tax Due Report. Instead you file only the Public Information Report or Ownership Information Report. Do not read the elimination of the No Tax Due Report as permission to file nothing. The information report is still required, still due May 15, and still the thing most owners forget.

When is the Texas franchise tax due in 2026?

The annual franchise tax report and any payment are due May 15, 2026. If May 15 lands on a weekend or state holiday, the deadline moves to the next business day. This date catches people off guard because it does not match the mid-April federal income tax deadline, so it is easy to file your federal return, exhale, and forget Texas entirely. New entities get a short grace period: your first report is due the May 15 of the year after you formed. If you need more time you can extend to November 15, but an extension to file is not an extension to pay. If you expect a balance, you generally must remit most of the estimated tax by May 15 to avoid penalties and interest.

What are the franchise tax rates in Texas?

There are two standard rates. Retail and wholesale businesses pay 0.375% of their taxable margin. Every other type of business, including service firms, contractors, and professional practices, pays 0.75%. There is also the EZ computation rate of 0.331%, available to businesses with $20 million or less in total revenue that choose the simplified method and give up the margin deductions. Which rate applies depends on your business activity and which calculation method you elect. A retailer and a service business with identical revenue can owe very different amounts, and even within one business the EZ rate versus the standard rate can flip which method is cheaper. That is why we run the calculation both ways rather than defaulting to whatever was filed last year.

What is the EZ computation and should I use it?

The EZ computation is a simplified way to calculate franchise tax for businesses with $20 million or less in total revenue. Instead of working through the four margin methods, you take total revenue, apportion it to Texas, and apply a flat 0.331% rate. It is faster and requires far less analysis. The catch is that you forfeit the cost of goods sold and compensation deductions. For a lean service business with few deductible costs, the EZ method is often both simpler and cheaper. For a business with heavy inventory or a large payroll, the standard margin calculation usually wins because those deductions shrink the taxable base more than the lower rate does. The right move is to calculate it both ways and file whichever produces the lower tax bill.

What happens if I miss the franchise tax deadline?

The penalties stack. You get an automatic $50 late-filing penalty just for filing after May 15, separate from any tax owed. Tax paid 1 to 30 days late carries a 5% penalty, and tax paid more than 30 days late carries 10%, with interest beginning to accrue after 60 days. The bigger risk is chronic non-filing. If an entity ignores its franchise tax long enough, the state can forfeit its right to transact business, which can pierce liability protection for owners and block your ability to bring or defend a lawsuit in Texas. The good news is that lapsed entities can usually be reinstated once the missing reports and payments are handled. If you are behind, address it deliberately rather than hoping it disappears, because it does not.

Do sole proprietors pay Texas franchise tax?

Generally no. Sole proprietorships and most general partnerships owned entirely by natural persons are not subject to the Texas franchise tax, because the tax applies to registered entities like LLCs, corporations, S-corps, and professional associations. If you never formed a formal entity and operate under your own name or a simple DBA, you most likely fall outside the franchise tax system. The line gets blurry when people assume they are a sole proprietor but actually filed LLC paperwork years ago, or when a partnership has an entity as one of its partners. Those situations pull you back into the franchise tax. If you are unsure how your business is registered, check your Secretary of State and Comptroller records rather than guessing, because the filing requirement follows your legal structure, not what you call yourself.

I owe $0 in franchise tax. Do I still have to file anything?

Yes, and this is the single most common mistake we correct for Houston owners. Being under the no-tax-due threshold means your tax is $0, but it does not eliminate your filing duty. You still must submit the Public Information Report or Ownership Information Report to the Comptroller by May 15 every year. Skipping it because you owed nothing leaves your entity with an unfiled report on record, which can eventually push you out of good standing and toward forfeiture. Think of the tax and the report as two separate obligations that happen to share a deadline. The payment may be zero, but the paperwork is not optional. Set a recurring reminder for early May so this never falls through the cracks, because reinstating a forfeited entity costs far more time and money than a five-minute report.

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