Key Takeaways

  • The Texas corporate tax rate applies as a franchise tax, based on a business’s taxable margin rather than net income.
  • The standard franchise tax rate is 0.75%, while retailers and wholesalers pay 0.375%.
  • Businesses with annual revenue below $2.47 million (2024 threshold) owe no franchise tax under the state’s “no tax due” rule.
  • Texas does not impose a state income tax, making it an attractive business environment.
  • The E-Z Computation method allows eligible entities to pay a simplified rate of 0.331% without deductions for cost of goods sold or compensation.
  • Proper classification of business type—corporation, LLC, partnership, or sole proprietorship—determines tax obligations.
  • Taxpayers must file the Texas Franchise Tax Report and pay by May 15 annually.
  • Out-of-state businesses earning income in Texas may still owe franchise tax if they have nexus (economic presence) in the state.

Texas corporate tax is referred to in the state of Texas as a franchise tax. When the state taxes most businesses, it is at a rate of one percent on the business's taxable margins. The definition of the lowest number is based on one of three figures: 70 percent of the company's total revenue, 100 percent of the revenue minus the cost of goods sold, or 100 percent of the revenue minus the total compensation. 

Information About Texas as a Business Location

One thing about Texas that continues steadily is its popularity as a location to conduct business. The figures for the state's unemployment and the growth of its job market attests to its desirability as a state for business opportunities. The unemployment rate as of 2015 showed a rate of 4.1 percent, which was one percentage point lower than the national unemployment rate.

Several reasons promote Texas as a favorable state for businesses. These include:

  • A positive tax climate.
  • Texas has low business taxes, and personal income is nonexistent.
  • Businesses can keep more of the company's profits due to low taxes, and businesses can use personal income taxes as an incentive when hiring new employees.
  • In some cases when the revenues of a business do not exceed certain thresholds, the tax rate drops to zero.
  • Small businesses just starting out have an opportunity to flourish and grow in the Texas tax climate.

Information About the Franchise Tax

The way the franchise tax works is relatively easy and straightforward. Most business types in Texas are subject to the franchise tax. The exceptions to not paying the franchise tax are for some general partnerships and sole proprietorships. Limited liability partnerships and limited liability companies (LLCs) are subject to paying the franchise tax.

  • The franchise tax of wholesale and retail companies is 0.5 percent regardless of the size of the business. 
  • A business earning an annual revenue of $10 million or less pay 0.575 percent when using the state's E-Z Computation form.
  • Using the E-Z Computation Form for deducting temporary credits or economic development, compensation, or cost of goods sold (COGS) is not allowed.
  • Businesses in 2015 that earned revenue of less than $1.08 million had no franchise tax at all. This is referred to as the no-tax-due threshold. 

Texas Franchise Tax Deadlines and Reporting

All entities subject to the Texas franchise tax must file an annual Franchise Tax Report and Public Information Report (for corporations and LLCs) or Ownership Information Report (for partnerships).

  • Due date: May 15 each year.
  • Extension: Taxpayers can request an automatic extension by prepaying a portion of the tax due.
  • Late filing penalty: 5% of the unpaid tax within 30 days, and 10% thereafter, plus possible interest.

Businesses can file electronically through the Texas Comptroller’s Webfile system, which allows for simplified computation and payment tracking.

Foreign entities “doing business” in Texas, even without a physical office, may still owe franchise tax if they exceed economic nexus thresholds (currently $500,000 in annual Texas receipts).

Texas Corporate Tax Rate and Computation

The Texas corporate tax rate is officially called the franchise tax, calculated on a business’s taxable margin rather than its income. For most entities, this margin is determined by one of four methods—whichever yields the smallest amount:

  1. 70% of total revenue,
  2. Total revenue minus cost of goods sold (COGS),
  3. Total revenue minus total compensation, or
  4. Total revenue minus $1 million (for entities choosing the E-Z Computation).

As of 2024, the standard Texas corporate tax rate is 0.75% for most taxable entities, and 0.375% for retail or wholesale businesses. Businesses that qualify for the E-Z Computation can opt to pay a simplified 0.331% rate but cannot claim deductions or credits under this method.

Texas updates its no-tax-due threshold periodically to adjust for inflation. For the 2024–2025 report year, businesses with less than $2.47 million in total annual revenue owe no franchise tax.

Even if a business owes no tax, it must still file a franchise tax report. Failing to file can result in penalties or loss of good standing with the Texas Comptroller of Public Accounts.

Most Common Texas Business Types

Corporations

Most small businesses are not set up as a corporation, but at some point, the owner will switch from a limited liability company or S corporation to a C corporation business structure when the business has reached a certain level of growth. 

The treatment for corporations when it comes to taxes is clear and to the point. Texas, like most states, requires corporations to pay a franchise tax. The E-Z Computation rules and no-tax-due threshold apply to corporations.

S Corporations

An S corporation provides businesses benefits under this business structure. Where a C corporation is subject to separate income tax and separate federal income tax, S corporations are not. With an S corporation, the shareholders are taxed based on the equity they have in the company. These are reasons that make the S corporation structure popular among small business owners.

S corporations are still responsible for the franchise tax based on the annual revenue of the business. The one percent tax rate remains the same and shareholders do not pay any state taxes on income received from the company.

Limited Liability Companies (LLCs)

Limited liability companies are the next most popular business structure for small businesses. In most states, a limited liability business structure protects its owners from certain legal liabilities. An LLC structure also passes the income of the company to the owners, who in turn pay personal income tax as an individual versus paying income tax as a business.

Texas does charge LLCs a franchise with the same rules in place that apply to other businesses. The income passed through to the owners is not subject to state income tax.

Partnerships and Sole Proprietorships

If a business is owned directly by a person(s) and the income is distributed to that person(s), the business is treated like a sole proprietorship and not subject to the franchise tax. The owners will pay federal income tax but not state tax.

The majority of businesses set up as a limited liability partnership (LLP) or limited partnerships (LP) are subject to the franchise tax.

How Texas Corporate Tax Differs from Other States

Unlike many U.S. states, Texas does not levy a corporate income tax. Instead, it relies on the franchise tax—a system designed to tax the privilege of doing business in the state. This structure benefits companies because:

  • No double taxation: Income isn’t taxed at both corporate and personal levels.
  • Predictable cost structure: The margin-based formula helps businesses plan around revenue growth without sharp tax jumps.
  • No personal income tax: Texas residents and business owners avoid state-level income tax on distributed profits.

Compared with states like California or New York—where corporate rates exceed 8%—Texas offers a significantly lower overall tax burden. This advantage contributes to the state’s consistent ranking as one of the best business climates in the U.S.

However, corporations operating across states should note that Texas does not allow combined reporting for multistate entities unless required under federal law. Each taxable entity must compute its franchise tax separately.

Credits, Deductions, and Exemptions

Texas offers limited but valuable credits and exemptions under its franchise tax laws, primarily aimed at stimulating economic growth and encouraging job creation. Common examples include:

  • Research and Development (R&D) Credit – Allows qualifying businesses to claim a credit against franchise tax for eligible R&D expenses.
  • Historic Structure Rehabilitation Credit – Applies to businesses investing in restoring certified historic structures in Texas.
  • Temporary Credits – Granted for certain job creation or capital investment projects authorized by the Comptroller.
  • Small Business Exemption – Entities under the no-tax-due threshold are exempt from paying, though not from filing.

To claim any credit, businesses must maintain detailed documentation supporting their eligibility and apply it when filing their annual franchise tax report.

Frequently Asked Questions

  1. What is the Texas corporate tax rate for 2025?
    The standard Texas franchise tax rate is 0.75%, or 0.375% for retail and wholesale businesses. Small businesses under $2.47 million in revenue owe no tax.
  2. Does Texas have a corporate income tax?
    No. Texas does not impose a traditional corporate income tax. Instead, businesses pay a franchise tax based on their taxable margin.
  3. Who must file a Texas Franchise Tax Report?
    Most business entities, including corporations, LLCs, and limited partnerships, must file annually—even if they owe no tax.
  4. When is the Texas franchise tax due?
    The annual report and payment are due on May 15 each year. Late filings incur penalties and may affect the entity’s good standing.
  5. Are there deductions or credits available under the Texas corporate tax system?
    Yes. Credits such as R&D or historic preservation are available, and businesses can choose margin calculation methods that minimize tax liability.

If you need help with Texas corporate tax, you can post your legal need on the UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.