Corporate Franchise Tax

Texas has no corporate income tax. However, Texas does have a franchise tax, which took a new form in 2008.

In 2008, Texas replaced its franchise tax with a tax based on the taxable entity’s “margin.” Changes made amended Texas Tax Code Chapter 171 to revise the existing franchise tax by changing the tax base, lowering the rate, and extending coverage to active businesses receiving state law liability protection.

The Texas Comptroller has published detailed information on the revision in the Franchise Tax Overview as well as a Franchise Tax Calculator worksheet. The Comptroller also provides an extensive and well organized Frequently Asked Questions page.

Entities Subject to Tax

The tax applies to corporations, limited liability companies, partnerships (general, limited and limited liability), business trusts, professional associations, business associations, joint ventures and other legal entities organized in Texas or that do business in Texas. The tax is not imposed on: sole proprietorships, general partnerships directly owned by natural persons, and other specified entities such as certain financial services businesses, nonprofits, and others.

In addition, a corporation in Texas engaged solely in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax. There is no ceiling on this exemption, so it is a substantial incentive for solar manufacturers.

Taxable entities with revenues of $1,180,000 or less owe no tax. Taxable entities who calculate their tax due to be less than $1,000 will owe no tax. However, all taxable entities, including those who will owe no tax, must file a return.

Tax Base

The revised tax base is the taxable entity's "margin." Margin equals the lesser of a taxable entity's: total revenue minus cost of goods sold, total revenue minus compensation, total revenue minus $1 million, or 70% of total revenue. Taxable margin will be the lowest of the four computations times the apportionment factor. An alternative to computing margin is available to taxable entities with revenue of $10 million or less (see Tax Rate section below).

  • Total revenue is determined based on federal income tax reporting, with certain exclusions.
  • Cost of goods sold generally includes costs related to the acquisition and production of tangible personal property and real property. There are other cost of goods sold allowances for certain industries. Taxable entities that only sell services will not generally have a cost of goods sold deduction.
  • Compensation and benefits include: W-2 wages and cash compensation paid to officers, directors, owners, partners and employees; and benefits provided to all personnel, including workers' compensation, health care and retirement benefits. Compensation does not include 1099 labor or payroll taxes paid by the employer.

The tax base is apportioned to Texas using a single-factor gross receipts apportionment formula―Texas gross receipts divided by gross receipts everywhere. Gross receipts everywhere will equal total revenue for almost all taxpayers.

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. Members of a combined group must use the same method to compute margin.

Tax Rate

The tax rate is 0.75% of margin for most taxable entities. The tax rate is 0.375% for entities primarily engaged in retail and wholesale trades (as defined in Divisions F and G of the 1987 Standard Industrial Classification Manual), excluding retailing or wholesaling of utilities, including telecommunications services, electricity or gas.

Tax payers whose total revenue is $20 million or less may elect for the E-Z Computation which provides an alternative to computing margin. E-Z filers may not claim any credits. For these filers, the franchise tax due is by multiplying total revenue by the apportionment factor and then multiplying the apportioned total revenue by a tax rate of 0.331%.