Texas Franchise Tax: What You Need to Know

by | Mar 22, 2024

When it comes to taxes, businesses operating in Texas have more than just federal income tax to consider. The Texas Franchise Tax, sometimes referred to as the “margin tax,” is a key component of the state’s tax system. Understanding this tax is essential for businesses of all sizes operating in the Lone Star State. In this guide, we’ll delve into what the Texas Franchise Tax is, who it applies to, how it’s calculated, and important considerations for businesses.

What is the Texas Franchise Tax?

The Texas Franchise Tax is a tax imposed on entities that do business in the state of Texas or are chartered/organized in Texas. Unlike the federal income tax, which is based on profits, the Texas Franchise Tax is based on a business’s margin, which is essentially its total revenue minus certain deductions.

Who Needs to Pay the Texas Franchise Tax?

Most types of entities doing business in Texas are subject to the Franchise Tax. This includes corporations, limited liability companies (LLCs), partnerships, business trusts, and other legal entities. However, certain entities are exempt from the tax, such as sole proprietorships, certain types of passive entities, and entities with annualized total revenue below a certain threshold.

How is the Texas Franchise Tax Calculated?

The calculation of the Texas Franchise Tax can be somewhat complex, but it generally involves determining a business’s margin and applying the applicable tax rate. Here’s a basic overview of the calculation process:

  • Calculate Total Revenue: This includes all income, including sales, services, rents, royalties, and interest, with certain adjustments and exclusions.
  • Determine Margin: Once total revenue is calculated, certain deductions and exclusions are applied to arrive at the business’s margin. Common deductions include the cost of goods sold, compensation, and certain other expenses.
  • Apply Tax Rate: The tax rate applied to the margin depends on the type of entity and its total revenue. As of 2024, the tax rate for most entities is 0.75% of total revenue. However, retailers and wholesalers have a lower rate of 0.375%.
  • Pay the Tax: Once the tax liability is calculated, businesses must file their Franchise Tax reports and pay any tax owed by the due date, typically May 15th for most entities.

Important Considerations for Businesses:

  • Annual Reporting Requirements: Businesses subject to the Texas Franchise Tax must file an annual report with the Texas Comptroller’s Office, even if they have no tax due.
  • Estimated Payments: Businesses with expected tax liabilities above a certain threshold may be required to make quarterly estimated tax payments throughout the year.
  • Tax Credits and Exemptions: There are various tax credits and exemptions available that can reduce a business’s Franchise Tax liability. These include credits for research and development, job creation, and investments in certain areas.
  • Compliance and Recordkeeping: Proper recordkeeping is crucial for compliance with the Texas Franchise Tax. Businesses should maintain accurate records of income, expenses, and other relevant financial information.

Also read: A Guide to Tax Filing for Small Businesses in Texas

The Texas Franchise Tax is an important aspect of doing business in Texas, and understanding its implications is vital for businesses operating in the state. By familiarizing yourself with the tax’s requirements, calculations, and important considerations, you can ensure compliance and minimize your tax liability. For personalized guidance and assistance with Franchise Tax matters, talk to us today!