Texas has no individual income tax and no corporate income tax - but it has the franchise tax, officially called the "margin tax," which applies to the privilege of doing business in Texas. The margin tax is not based on profit - it is based on taxable margin, computed as revenue minus one of four deduction options. A business that loses money can still owe Texas franchise tax. The no-tax-due threshold of $2.65 million for 2026 and 2027 reports exempts most small businesses, but companies above that threshold must navigate four different computation methods to find the one that produces the lowest liability.
No-tax-due threshold: $2,650,000 in total revenue for 2026 and 2027 reports (indexed; the statutory base amount is $2.47 million). Entities at or below this threshold file a no-tax-due report but owe no tax.
Standard rate: 0.75% of taxable margin for most taxable entities.
Retail/wholesale rate: 0.375% for entities primarily engaged in retail or wholesale trade (more than 50% of revenue from retail/wholesale).
EZ computation: 0.331% of total revenue (no margin deduction). Available to entities with total revenue under $20 million. Simplest method but may not be lowest.
Taxable margin equals total revenue minus one of the following four deductions - the taxpayer chooses the method that produces the lowest margin (and lowest tax):
Method 1 - COGS deduction: Total revenue minus cost of goods sold. COGS is defined broadly for Texas purposes - it includes materials, labor, overhead allocated to production, depreciation on production equipment, and certain other costs directly related to goods. Service businesses typically have minimal COGS and cannot use this method effectively.
Method 2 - Compensation deduction: Total revenue minus compensation paid to employees and officers, capped at $480,000 per person for 2026 and 2027 reports. Compensation includes wages, salaries, benefits, and retirement plan contributions. Service businesses and professional firms with significant payroll use this method most frequently.
Method 3 - 30% of revenue: Total revenue multiplied by 70% (i.e., deduct 30% of revenue). Simple, predictable, and often the best method for businesses with both significant COGS and significant compensation.
Method 4 - $1 million deduction: Total revenue minus $1 million (§171.101(a)(1)(B)).
EZ computation (separate alternative to the four methods): 0.331% of apportioned total revenue without any margin deduction (§171.1016). Available only to entities with total revenue of $20 million or less.
Most entities doing business in Texas are taxable entities subject to the franchise tax: corporations, LLCs, partnerships, business trusts, and professional associations. Sole proprietorships are not taxable entities. Key exemptions: passive entities (general or limited partnerships and non-business trusts with at least 90% of federal gross income from passive sources - dividends, interest, capital gains from the sale of real property, commodities, and securities, and mineral royalties, but not rent - and no more than 10% from an active trade or business - are not taxable entities); general partnerships where all partners are natural persons; and certain qualifying nonprofit organizations.
Texas requires combined reporting for affiliated groups - entities that are part of an affiliated group engaged in a unitary business must file a combined group report (§171.1014). The group includes the entities in which the parent owns more than 50% directly or indirectly that are engaged in that unitary business. Combined reporting prevents income shifting within an affiliated group and ensures that all Texas-apportioned income of the group is subject to franchise tax. The combined group uses a single apportionment factor based on Texas gross receipts divided by total gross receipts of the group.