How to File Texas Franchise Tax

What is the Texas Franchise Tax?

The Texas Franchise Tax is levied annually by the Texas Comptroller on taxable entities doing business in the state that make over $2.47 million in annual revenue. The tax is based upon the entity’s margin and can be calculated in a number of different ways. Businesses that are eligible for this tax must file a Franchise Tax Report by May 15 each year.

Business entities under the $2.47 million threshold don’t need to file a Texas Franchise Tax Report but still need to file a Public Information Report or Ownership Information Report by May 15.

Who Must Pay the Franchise Tax?

These entities must pay franchise tax if they do business in Texas and earn over $2.47 million in total revenue:

  • Other Legal Entities
  • Corporations
  • LLCs & Series LLCs
  • Banks
  • State Limited Banking Associations
  • Savings and Loan Associations
  • S-Corporations
  • Professional Corporations
  • All Partnerships
  • Trusts
  • Professional Associations
  • Business Associations
  • Joint Ventures

Which Entities Are Excluded?

  • Unincorporated Political Committees
  • Sole Proprietorships (Except Single Member LLCs)
  • General Partnerships Owned Directly by a Single Natural Person
  • Entities Exempt Under Tax Code Chapter 171, Subchapter B
  • Certain Unincorporated Passive Entities
  • Certain Grantor Trusts, Estates of Natural Persons & Escrows
  • Real Estate Mortgage Investment Conduits
  • Certain Qualified Real Estate Investment Trusts
  • Non Profit Self-Insurance Trust (Insurance Code Chapter 2212)
  • Trusts Qualified Under IRS Code Section 401(a)
  • Trusts Exempt Except Under IRS Code Section 501(c)(9)

What is the Public Information Report?

The majority of business entities in Texas (those making less than $2.47 million in revenue) no longer need to file a Franchise Tax Report, but they still file a Public Information Report. These entities include:

  • Corporations
  • LLCs & Series LLCs
  • Limited Partnerships
  • Professional Associations
  • Financial Institutions

Other non-exempt business entities, such as trusts, instead file an Ownership Information Report. For both forms, the deadline is May 15, and the form can be mailed to the Texas Comptroller.

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Calculating the Franchise Tax

The Texas Franchise Tax is calculated on a company’s margin for all entities with revenues above $2,470,000. The margin’s threshold is subject to change each year.

The margin can be calculated in one of the following ways:

  • Total Revenue Multiplied by 70 Percent
  • Total Revenue Minus Cost of Goods Sold
  • Total Revenue Minus Compensation
  • Total Revenue Minus $1 Million

How is Total Revenue Calculated?

Total revenue is calculated by taking revenue amounts reported for federal income tax and subtracting statutory exclusions.

Statutory exclusions include:

  • Dividends & Interests From Federal Obligations
  • Schedule C Dividends
  • Foreign Royalties & Dividends (IRS Code Sections 78 & 951-964)
  • Certain Flow-Through Funds
  • Other Industry-Specific Exclusions

How is the Cost of Goods Sold Calculated?

Cost of goods sold includes costs related to the acquisition and production of tangible personal property and real property. Other allowances are made for specific industries. If your company sells services, it typically will not have a cost of goods sold deduction.

How is a Compensation Deduction Calculated?

Compensation deductions include:

  • W-2 Wages & Cash Compensation to Directors/Owners/Partners/Employees
  • Benefits Provided to All Personnel to Extent Deductible for Income Tax Purposes

Compensation does not include 1099 labor or payroll taxes paid by the employer.

Available Tax Credits

Certified Historic Structures Rehabilitation Credit under TX Tax Code Chapter 171, Subchapter S

Temporary Credit for Business Loss Carryforwards under TX Tax Code Section 171.111

Research and Development Activities Credit under TX Tax Code Chapter 171, Subchapter M

How to File

There are two ways to file the Texas Franchise Tax Report:

  • EZ Computation
  • Long Form

If your business falls under the $2,470,000 revenue limit, then you don’t owe any franchise tax, but you may still need to file a Public Information Report or Ownership Information Report. If you are above the limit, you can choose to fill out and file the EZ Computation form or to take the time to fill out the Long Form.

You can download the Franchise Tax, PIR, or OIR form you need from the Comptroller and submit them by mail to the following address:

Texas Comptroller of Public Accounts
PO Box 149348
Austin, TX 78714-9348

Extensions

If you need more time to file your Franchise Tax Report, you can submit a Franchise Tax Extension with the Comptroller. The Comptroller will generally only accept an extension if 90 to 100 percent of the tax owed is paid by May 15.

There are four different types of Franchise Tax Extensions, depending upon your situation.