Two Returns Every Year, Not One
A Texas business pays no state income tax, but most incorporated businesses still file two annual returns: the federal income tax return and the Texas franchise tax report. The franchise tax is a tax on margin, calculated from total revenue, so a company that lost money can still owe it, and a profitable company below the revenue threshold can owe nothing. BOMCAS prepares both and makes sure the revenue, cost and compensation figures on the Texas report trace back to the federal return.
Who Owes the Franchise Tax
The Comptroller treats corporations, limited liability companies, limited partnerships, professional associations, business trusts and most other legal entities as taxable entities. Sole proprietors and general partnerships made up entirely of natural persons are outside it, which is one reason entity choice matters more in Texas than the "no income tax" label suggests. An out-of-state company can also owe the tax: an entity with at least $500,000 in gross receipts from business done in Texas has nexus even without an office or employees here.
Rates and Thresholds for 2026 and 2027 Reports
- No tax is due when annualized total revenue is $2.65 million or less.
- The rate is 0.75 percent of taxable margin, or 0.375 percent for entities primarily engaged in retail or wholesale trade.
- Entities with annualized total revenue of $20 million or less may use the EZ computation at 0.331 percent of apportioned revenue, though that method allows no deductions or credits.
- The compensation deduction is capped at $480,000 per person for these report years.
- If the calculated tax is less than $1,000, the report is still filed but nothing is paid.
Thresholds are indexed every two years, so we confirm the figures for each report year before filing.
Choosing the Margin Method
Taxable margin is the lowest of four calculations: 70 percent of total revenue, revenue minus cost of goods sold, revenue minus compensation, or revenue minus $1 million. The Texas definition of cost of goods sold is narrower in some places and broader in others than the federal one, and compensation includes W-2 wages, benefits and net distributive income to individual owners but excludes 1099 contractor payments and the employer's payroll taxes. A staffing firm, a distributor and a software company will usually land on different methods, and the same company can switch from year to year as its mix of costs changes. We run each calculation rather than repeating last year's choice.
Apportionment and Combined Groups
Margin is apportioned to Texas using a single gross receipts factor, so a company that sells mostly outside the state pays tax only on its Texas share. Affiliated entities under common ownership that operate as a unitary business file one combined report, and the combined group, not each entity, decides the margin method. When a company is bought, sold or reorganized during the year, group membership and the accounting period both need review.
The Information Report
Almost every taxable entity must file a Public Information Report (corporations and LLCs) or an Ownership Information Report (partnerships and other entities) each year, even if it owes no tax and files no franchise tax report. Passive entities and qualifying new veteran-owned businesses are the main exceptions. The report lists officers, directors, managers or owners. An entity that does not file it can lose its right to transact business in Texas, and officers and directors can become personally liable for debts created while the right is forfeited.
Due Dates and Extensions
The annual franchise tax report is due May 15. An extension request filed by that date, with the required payment, generally moves the due date to November 15; businesses required to pay electronically follow a two-step extension, first to August 15. Federal returns for calendar-year S corporations and partnerships are due March 15 and C corporation returns April 15, so the federal return is usually finished first and the Texas report built from it.
Federal Returns We Prepare
- Form 1120-S for S corporations, with K-1s for each shareholder.
- Form 1065 for partnerships and multi-member LLCs.
- Form 1120 for C corporations, including reviews of retained earnings and shareholder loans.
- Schedule C for sole proprietors and single-member LLCs, prepared with the owner's personal return.
Recent federal law made 100 percent bonus depreciation permanent for qualified property acquired after January 19, 2025 and raised the section 179 limit, which matters to equipment-heavy Texas businesses such as oilfield service companies, contractors and trucking firms. Full expensing reduces federal tax but does not change total revenue on the Texas report, so the two returns can move in different directions.
Neighbouring States
Louisiana, Oklahoma, Arkansas and New Mexico all tax business income. A Texas company with crews, inventory or a large customer base in those states may owe returns there, and its owners may owe nonresident returns. We review where work is done and where sales are shipped each year.
How We Work
We start with your trial balance, last year's federal return and franchise tax report, fixed asset additions and payroll totals. We send one list of questions, prepare the federal return and the Texas report, and walk you through both before anything is filed.
Texas Business Tax Preparation Questions
Does a Texas LLC pay franchise tax if it lost money?
It can. The tax is based on margin, which starts from total revenue rather than profit. If annualized total revenue is $2.65 million or less for a 2026 or 2027 report, no tax is due, but the information report is still required.
Is a sole proprietorship subject to the Texas franchise tax?
No. Sole proprietors and general partnerships owned directly by natural persons are not taxable entities. An LLC owned by one person is a taxable entity, even though it is disregarded for federal income tax.
When is the Texas franchise tax report due?
May 15 each year. A timely extension request with the required payment generally extends the due date to November 15.
Can an out-of-state company owe Texas franchise tax?
Yes. A company with $500,000 or more in gross receipts from business done in Texas has nexus, even without a physical presence.
Talk to BOMCAS About Business Tax Preparation in Texas
The margin calculation depends on books that separate Texas cost of goods sold and compensation, and the compensation figures come straight from payroll. Owners usually have their personal returns done alongside the business, sellers reconcile revenue to their sales and use tax returns, and decisions about entity type or equipment belong in tax planning. A forfeited or behind entity starts with back taxes and late filing, and Canadian owners or parent companies should read about cross-border tax. For a summary of how Texas taxes businesses and residents, see the Texas accounting and tax overview or our United States services.
Tell us what you need help with and we will reply with next steps. Contact BOMCAS, use the contact form below, call 780-667-5250 or email info@bomcas.ca. You can also go back to the Texas overview. This page is general information, not advice for a particular situation.