Texas Franchise Tax for LLCs and S-Corps: What You Owe in 2026

Key Takeaways

• The 2026 no-tax-due threshold is $2.65 million: If your LLC or S-Corp’s annualized total revenue falls at or below this figure, you owe zero franchise tax but you must still file a Public Information Report (PIR) or Ownership Information Report (OIR).
• Texas ignores your federal S-Corp election: The franchise tax applies at the entity level. Being a pass-through entity for federal purposes does not exempt your S-Corp from Texas franchise tax.
• You have four margin calculation methods: Run all four (70% of revenue, revenue minus COGS, revenue minus compensation, revenue minus $1 million) and use the lowest. Choosing wrong means overpaying.
•  Missing the May 15 deadline triggers immediate penalties: A $50 late-filing fee hits even on $0 reports. Unpaid tax penalties escalate to 5–10%, and interest starts at day 61.

Clean books are your best defense: Franchise tax calculations start from your federal return. Errors in bookkeeping cascade into incorrect margin calculations, wrong report types, and avoidable penalties.

What Is the Texas Franchise Tax? A Quick Primer

The Texas franchise tax is a privilege tax imposed on taxable entities formed, organized, or conducting business in Texas. It is not an income tax. It is not a sales tax. It is a margin-based business tax that the state levies for the right to operate within its jurisdiction (Texas Tax Code Chapter 171).

Think of it this way: Texas traded not having a state income tax for having a franchise tax that hits businesses directly. And unlike traditional income taxes that target profit, the Texas franchise tax targets revenue minus select deductions—a structure called taxable margin. That distinction matters, because a business can owe franchise tax even during an unprofitable year if its total revenue exceeds the threshold.

Who Must File?

Nearly every structured business entity in Texas is subject to franchise tax reporting. This includes:

• LLCs (single-member, multi-member, and series LLCs)
• S-Corporations
• C-Corporations
• Limited partnerships (LPs) and limited liability partnerships (LLPs)
• Professional associations and business trusts
• Out-of-state entities with Texas nexus (physical or economic)

Who Is Exempt?

The following entities generally do not file or pay franchise tax:

• Sole proprietorships (unless structured as a single-member LLC)
• General partnerships where all direct owners are natural persons (excluding LLPs)
• Certain passive entities under Texas Tax Code Section 171.0003
• Pre-qualified new veteran-owned businesses (exempt for first five years under Section 171.0005)
• Entities exempt under Tax Code Chapter 171, Subchapter B

Here’s the critical point many owners miss: filing is not the same as paying. Even if your revenue is well below the threshold and you owe zero tax, you may still be required to file an information report. Skipping that filing can trigger a $50 penalty and jeopardize your standing with the state.

2026 Franchise Tax Rates, Thresholds, and Key Numbers

The Texas Comptroller has published the rates and thresholds for the 2026 and 2027 report years. Here’s a summary of the numbers that matter most:
Here’s a summary of the numbers that matter most:

Source: Texas Comptroller of Public Accounts, 2026 Franchise Tax Report Forms

What changed from 2024–2025?

The tax rates remained unchanged. However, the no-tax-due threshold increased from $2,470,000 to $2,650,000, and the compensation deduction limit was adjusted for inflation. Additionally, the Comptroller amended the total revenue rule (34 TAC § 3.587) effective March 1, 2026, updating how total revenue ties to the current federal income tax return rather than strictly the 2007 IRC baseline.

If your business is near that $2.65 million threshold, even small fluctuations in revenue classification can push you from “no tax due” into a full margin computation. This is one area where controller-level oversight becomes invaluable catching revenue classification errors before they become compliance problems.

How the Texas Franchise Tax Applies to LLCs

This is where the Texas franchise tax LLC conversation gets specific. Under Texas law, LLCs are taxable entities, period. It does not matter whether the IRS treats your LLC as a disregarded entity, a partnership, or even a corporation for federal purposes. Texas evaluates your LLC as a legal entity, not based on its federal tax classification.

Single-Member LLCs

If you’re a sole owner operating through a single-member LLC, you might assume you’re treated like a sole proprietorship for Texas franchise tax purposes. You’re not. Single-member LLCs are expressly included in the franchise tax definition of taxable entities. You must file annually, and if your annualized total revenue exceeds the no-tax-due threshold, you owe tax on your calculated margin.

Multi-Member LLCs

Multi-member LLCs typically classified as partnerships for federal tax purposes face the same entity-level franchise tax obligation. Each member’s share of the LLC’s income is not what’s taxed. Texas taxes the entity’s total revenue, not the pass-through distributions to individual members. This distinction catches many owners off guard, especially those accustomed to states where partnership-level entity taxes don’t exist.

LLCs Electing S-Corp or C-Corp Tax Treatment

If your LLC has elected to be taxed as an S-Corp (via IRS Form 2553) or as a C-Corp (via Form 8832), your Texas franchise tax obligation does not change. The franchise tax is based on the entity’s legal formation, not its federal election. Your margin calculation method may differ slightly depending on which federal return lines feed into total revenue, but the filing and payment obligations remain identical.

Keeping these distinctions straight requires financial records that align both federal and state requirements. AI-powered bookkeeping helps by automatically categorizing transactions to match the chart of accounts your franchise tax filing depends on.

How the Texas Franchise Tax Applies to S-Corps

Many S-Corp owners assume that because the IRS treats S-Corps as pass-through entities, Texas will do the same. It will not. Texas franchise tax is imposed on the legal entity itself, not on individual shareholders. The state has no regard for your federal S-Corp election when determining franchise tax obligations.

What This Means in Practice

Your Texas-registered S-Corp must file a franchise tax report annually, calculate taxable margin if above the no-tax-due threshold, and submit a Public Information Report (PIR) regardless of whether any tax is owed. The S-Corp’s individual shareholders will not owe state-level tax on their respective portions of corporate income Texas has no personal income tax but the entity itself is fully within the franchise tax framework.

S-Corps vs. LLCs: Does Entity Choice Affect Your Franchise Tax?

From a Texas franchise tax standpoint, the difference between an LLC and an S-Corp is minimal. Both are subject to the same rates, the same threshold, and the same margin calculation methods. The primary distinction lies in how total revenue is derived from the federal return:

• LLCs taxed as partnerships pull total revenue from Form 1065 line items
• LLCs taxed as disregarded entities pull from Schedule C or the individual return
• S-Corps pull from Form 1120-S line items

The downstream franchise tax calculation margin, apportionment, and rate application works identically. The entity choice between LLC and S-Corp primarily matters for federal self-employment tax and payroll structuring, not for Texas franchise tax.

How to Calculate Your Taxable Margin: A Step-by-Step Walkthrough

If your annualized total revenue exceeds the $2.65 million no-tax-due threshold (per the Texas Comptroller), you must calculate your taxable margin. Texas provides four statutory methods, and the law allows you to choose whichever produces the lowest taxable margin:

The Four Margin Calculation Methods

1.   70% of Total Revenue — A simple cap. No deductions needed. Your margin cannot exceed 70% of total revenue.
2.   Total Revenue minus Cost of Goods Sold (COGS) — Best for product-based, manufacturing, and retail businesses with significant direct costs.
3.   Total Revenue minus Compensation — Ideal for service businesses with high payroll. The per-employee deduction is capped (adjusted biennially for inflation).
4.   Total Revenue minus $1 Million — A flat statutory deduction. Simple, but often not the lowest option for larger entities.

Practical Example

Imagine a Texas-based consulting LLC with $4,000,000 in total revenue, $800,000 in qualifying compensation, and $200,000 in COGS. Here’s how each method plays out:

In this scenario, the 70% method produces the lowest margin of $2,800,000. At the standard 0.75% rate with 100% Texas apportionment, the franchise tax would be $2,800,000 × 0.0075 = $21,000. But with the compensation method, you’d pay $3,200,000 × 0.0075 = $24,000 a $3,000 difference from just one wrong choice.

Expert insight: Always run all four methods before filing. The optimal method can change year to year as your revenue mix, headcount, and cost structure evolve. This is the type of analysis a fractional CFO performs routinely—ensuring you never overpay due to a default calculation.

The EZ Computation Alternative

If your annualized total revenue is $20 million or less, you can opt for the EZ Computation method. This applies a flat rate of 0.331% to your apportioned total revenue. It’s simpler, but there’s a trade-off: you cannot deduct COGS or compensation, and you cannot claim any franchise tax credits (including the R&D credit). For service businesses with low deductible expenses, EZ can sometimes result in a lower bill. For businesses with significant payroll or direct costs, the Long Form nearly always wins.

 Filing Requirements: What Reports You Need to Submit

Your filing obligations depend on where your revenue falls relative to the no-tax-due threshold.

If Your Revenue Is At or Below $2.65 Million

You are not required to file a franchise tax report. However, you must still file a Public Information Report (PIR) or Ownership Information Report (OIR) annually. This requirement exists even when no tax is owed. The PIR (Form 05-102) applies to LLCs, corporations, and professional associations. The OIR (Form 05-167) applies to trusts, associations, and other non-registered entities.

If Your Revenue Exceeds $2.65 Million

You must file one of the following franchise tax reports in addition to your PIR or OIR:

• EZ Computation Report (Form 05-169): For entities with total revenue of $20 million or less that elect the simplified 0.331% rate method.
• Long Form Report (Form 05-158): For all entities that don’t use EZ Computation and are above the no-tax-due threshold. This is where you select your margin calculation method.

How to File

The Texas Comptroller’s Webfile system is the standard electronic filing portal. You will need your 11-digit Texas taxpayer number, complete total revenue figures, apportionment data (if multistate), and current officer and ownership details for the PIR/OIR.

Filing accuracy hinges on the quality of your underlying financial data. Rushed or incomplete books lead to wrong report types, miscalculated margin, and missed deadlines. This is where structured tax compliance services make the difference ensuring every number on your franchise tax filing ties back to verified, reconciled records.

Deadlines, Extensions, and What Happens If You Miss Them

The May 15 Deadline

All Texas franchise tax reports and payments are due May 15, 2026. If May 15 falls on a weekend or state holiday, the deadline shifts to the next business day (Texas Comptroller). This is a fixed annual date not based on your entity’s formation anniversary.

Extensions

You can request an extension to file (not to pay) by submitting Form 05-164 or making an online extension payment by May 15. The extended deadline is November 15, 2026. However, to avoid penalties on the extension itself, you must pay at least 90% of the current year’s tax due or 100% of the prior year’s tax by May 15.

Penalties and Interest

The Texas Comptroller imposes a cascading penalty structure:

• $50 late-filing penalty: Assessed on every report filed after May 15, even if no tax is owed.
• 5% penalty: Applied to unpaid tax if paid 1–30 days after the due date.
• 10% penalty: Applied to unpaid tax if paid more than 30 days after the due date.
• Interest: Begins accruing 61 days after the due date on any unpaid balance.
• Forfeiture risk: Continued non-compliance can result in the Texas Comptroller forfeiting your entity’s right to conduct business. The Secretary of State can subsequently forfeit your charter or registration, affecting bank accounts, contracts, and legal standing.

Reinstatement process: To reinstate a forfeited entity, you must file all delinquent reports (including PIR/OIR), pay all outstanding tax, penalties, and interest, obtain a Tax Clearance Letter from the Comptroller, and then file reinstatement paperwork with the Secretary of State. This process can delay real estate closings, loan applications, and contract execution.

Common Mistakes That Cost Texas LLC and S-Corp Owners Money

Based on common compliance errors documented by the Texas Comptroller and tax professionals, here are the most frequent and costly mistakes:

• Assuming “No Tax Due” Means “No Filing Required”

This is the single most common error. Even if your LLC or S-Corp has zero franchise tax liability because revenue falls below the threshold, you must still file a PIR or OIR annually. Failing to do so triggers a $50 penalty and can eventually lead to forfeiture of your business’s good standing.

• Not Running All Four Margin Methods

Many business owners default to a single calculation method—often the $1 million deduction because it’s easy to understand. But the optimal method depends on your specific revenue, payroll, and cost structure. Failing to run all four methods and compare results frequently leads to overpayment.

• Confusing Federal Pass-Through Status with State Exemption

S-Corp and LLC owners routinely assume that because they don’t pay federal entity-level tax, Texas won’t tax the entity either. Texas franchise tax applies regardless of federal classification. This misunderstanding can result in missed filings and accruing penalties.

• Choosing EZ Computation Without Evaluating Credits

The EZ method is simple, but it disqualifies you from all franchise tax credits, including the R&D Activities Credit (available through December 31, 2026, with carryforward rules) and the Historic Structures Rehabilitation Credit. If your business qualifies for credits, the Long Form almost always produces a better outcome.

• Messy Books Leading to Incorrect Total Revenue

Total revenue for franchise tax purposes starts from specific line items on your federal return. If your books contain misclassified transactions, duplicated entries, or unreconciled accounts, those errors flow directly into your franchise tax calculation. Structured bookkeeping services eliminate this risk by maintaining clean, categorized, reconciled financials throughout the year not just at filing time.

2026 Rule Change: Updated IRC Conformity for Total Revenue

Effective March 1, 2026, the Texas Comptroller amended the franchise tax rule on total revenue (34 TAC § 3.587). For reports due on or after January 1, 2026, total revenue is now generally based on amounts reported on a taxpayer’s current federal income tax return, rather than the 2007 Internal Revenue Code baseline that was previously used for most components.

What does this mean practically? If your business claimed bonus depreciation or other post-2007 IRC provisions on your federal return, those amounts now directly affect your Texas franchise tax total revenue figure. The Comptroller has created a net depreciation adjustment mechanism for businesses that previously relied on the 2007 IRC depreciation rules for their COGS calculations.

This is a nuanced change that can affect margin calculations particularly for capital-intensive businesses. If your LLC or S-Corp has significant depreciable assets, consult with a qualified tax professional or explore how CFO-level advisory can help you model the impact before filing. 

FAQ

• Do LLCs pay franchise tax in Texas?

Yes. All LLCs formed or doing business in Texas—including single-member LLCs—are subject to the Texas franchise tax. The tax applies to the legal entity regardless of how the IRS classifies it for federal purposes. If your annualized total revenue is at or below $2.65 million for the 2026 report year, you owe no tax, but you must still file a Public Information Report (PIR) annually (Texas Comptroller).

• Does an S-Corp have to pay Texas franchise tax?

Yes. Texas does not recognize the federal S-Corp election for franchise tax purposes. The franchise tax is imposed on the entity itself, not on individual shareholders. Your S-Corp must file annually, calculate margin if above the threshold, and submit a PIR each year.

• What is the no-tax-due threshold for 2026?

The no-tax-due threshold for the 2026 report year is $2,650,000 in annualized total revenue. This is an increase from the $2,470,000 threshold that applied for 2024–2025 reports. Entities below this threshold owe no franchise tax but must still file their information report (Texas Comptroller 2026 Forms).

• What happens if I miss the May 15 franchise tax deadline?

A $50 late-filing penalty applies to every report filed after the due date—even if no tax is owed. If you owe tax and pay late, a 5% penalty applies for the first 30 days, escalating to 10% after 30 days. Interest begins accruing 61 days after the due date. Continued non-filing can result in forfeiture of your entity’s right to conduct business in Texas (Texas Comptroller).

• What is the EZ Computation and should I use it?

The EZ Computation is a simplified filing option for entities with annualized total revenue of $20 million or less. It applies a flat 0.331% rate to your apportioned total revenue. The trade-off is that you cannot deduct COGS or compensation, and you cannot claim any franchise tax credits. If your business has significant payroll costs, direct material costs, or qualifies for R&D or historic structure credits, the Long Form report will almost always produce a lower tax liability. Run both calculations before deciding.

Conclusion

The Texas franchise tax is not optional, and it does not forgive ignorance. Whether you operate a bootstrapped single-member LLC or a growing S-Corp with multistate revenue, the rules apply equally. The good news? The 2026 threshold increase to $2.65 million means more small businesses than ever will owe zero franchise tax. But even zero-liability entities have reporting obligations that carry real penalties if missed.

The smartest move you can make is to ensure your financial records are accurate, reconciled, and categorized correctly throughout the year, not just in the weeks before May 15. When your books are clean, your margin calculation is reliable. When your margin calculation is reliable, you pay only what you legally owe and nothing more.

At Otterz, we’re not just bookkeepers, we’re a full AI-powered financial back office. From bookkeeping and tax compliance to controller and CFO-level advisory, we help business owners across every stage make smarter financial decisions. If you’re a Texas LLC or S-Corp owner who wants clean books, on-time filings, and margin optimization handled for you, book a free consultation with a CFO today.