How To File
a Texas Franchise
Your business may not owe any franchise tax, but you’ll still need to file the report each year to stay in Texas’s good books. Here’s everything you should know about the Texas Franchise Tax Report.
The Texas Franchise Tax Report
As Texas has no net corporate or personal income tax, the Texas Franchise Tax is our state’s primary tax on businesses. Fortunately, the No Tax Due Threshold, currently set at $1,230,000, prevents most small companies (like LLCs) from having to pay any franchise tax.
But whether or not tax is owed, you’ll need to file a Texas Franchise Tax Report every year to keep your business in good standing.
If you think this crucial deadline might slip under your radar—or you’d just rather pass on the paperwork to someone else—hire Independent Texas! Our Texas registered agent service includes free due date tracking and reminders, and you can add our Franchise Tax Report service to any of our other business services at checkout. (Click on “About Our Texas Franchise Tax Report Service” in the guide below to learn more).
DIY-ers, keep reading—this guide covers everything you need to know about completing the Texas Franchise Tax Report on your own.
1. Texas Franchise Tax Basics
- Who pays Texas Franchise Tax? Almost every legal business entity in Texas. The list includes corporations, LLCs, LPs, LLPs, and nonprofits. Sole proprietorships and general partnerships are not subject to the franchise tax (or reporting requirements), as these business types don’t provide any liability protection to their owners. “Passive entities” (businesses that derive income only from passive sources like net capital gains or dividends), real estate investment trusts (REITs) and certain insurance organizations don’t have any franchise tax obligations either. For a complete list, see the section titled “Entities Not Subject to Franchise Tax” on the Franchise Tax Overview page of the Comptroller’s website. Certain entities that would normally be subject to the tax—such as nonprofits and historical structure rehabilitation organizations—can apply for exemption or franchise tax credits through the Comptroller’s office.
- What are the different Texas Franchise Tax rates? Businesses with annual revenues over the No Tax Due Threshold of $1,230,000 may qualify for a number of different tax rates, depending on their industry and total revenue amount. If your company’s annual revenue is $20 million or less, you can use the EZ Computation method to file your tax return. This method applies a tax rate of .331 percent to all Texas-based earnings. If you decide not to use the EZ computation method—or your revenue is over the qualifying threshold—you’ll pay tax on your entity’s margin (total revenue after deductions). The rates are .0375 percent (for qualifying retail or wholesale businesses), or .75 percent (for all other businesses).
- What’s the Texas Franchise Tax due date? The Texas Franchise Tax Report is due every year on May 15, starting the year after you form or register. Qualifying veteran-owned businesses do not need to pay any franchise tax for their first 5 years, although business owners still need to file a No Tax Due Report. Note: Due to Covid-19, the 2020 filing deadline for all franchise taxpayers has been extended to July 15. Updates to filing deadlines are posted to the Comptroller’s main Franchise Tax page.
2. Determining If Your Business Owes Franchise Tax
If any of the following are true, your business doesn’t owe franchise tax—but you’ll still need to file an annual franchise tax report:
- Your entity’s annualized revenue is at or below the No Tax Due Threshold. (See the next section for how to find annualized revenue).
- You are considered a passive entity under Texas Tax Code Chapter 171.0003.
- You have zero Texas receipts.
- Your business is a real estate investment trust.
- Your business is a new, qualifying veteran-owned business.
If your company doesn’t meet at least one of the criteria above (and it’s not a sole proprietorship or general partnership), then franchise tax is owed.
3. How to Calculate Annual Revenue
If your business has had a complete 12-month tax year, you’ll find total revenue by looking at your federal income tax return. Businesses less than 12 months old will need to find their total revenue—then “annualize” it—to determine their tax liability.
- Total Revenue This is the total income from your entire business during the tax year—including gross receipts or sales, dividends, interest, rents, royalties and other income—minus federal statutory deductions. The dollar amounts you list on your Texas Franchise Tax Report will correspond with specific line items on your business’s IRS tax return.
- Annualized Total Revenue Your company’s first tax year (for franchise tax purposes) may be shorter than 12 months. In this case, you’ll need to calculate “annualized” revenue to find out whether your business owes tax—and if so, whether it qualifies for the EZ-Computation filing method. To find annualized revenue, divide your business’s total revenue by the number of days since it became subject to the franchise tax, then multiply the result by 365.
4. Filing Your Texas Franchise Tax Report
Whether or not you owe a payment, the first few steps to filing a Franchise Tax Report are the same:
Receive your Franchise Tax Responsibility Letter from the Comptroller.
Shortly after the Texas Secretary of State approves your new business, you’ll receive a Franchise Tax Responsibility Letter from the Texas Comptroller. The purpose of this letter is to give you the information you’ll need to set up your franchise tax account. Within the franchise tax letter you’ll find:
- Your 11-digit Texas taxpayer ID number. The Comptroller uses this number to identify your entity for franchise and sales tax purposes.
- Your WebFile number. This number, which begins with “FQ,” is the temporary access code that allows you to create a WebFile account. After you log in to the system for the first time and complete your franchise tax questionnaire (addressed in the next step), you’ll receive a permanent WebFile number beginning with “XT” for your franchise tax account.
Create a WebFile account and complete the Franchise Tax Questionnaire.
The first time you log into WebFile, you’ll need to create a new user account.
Once you’ve done this, you can complete the online Franchise Tax Accountability Questionnaire in your account. The questionnaire serves two purposes: it helps the Texas Comptroller determine your business’s franchise tax obligations, and it gives you a chance to update the mailing address the Comptroller has on file for your business (if you wish to do so).
Please note that once your Texas entity has been approved, the franchise tax questionnaire needs to be submitted within 30 days.
Once you’ve finished these initial steps, the Texas franchise tax forms you use and the information you must provide depends on whether or not you owe a franchise tax payment.
If You Don’t Owe:
If your business does not owe franchise tax, you’ll file a No Tax Due Report (Form 05-163) as well as a Texas Franchise Tax Public Information Report (Form 05-102).
Fortunately, these documents have been combined into one streamlined electronic form—called the No Tax Due Information Report—in the Comptroller’s WebFile system. To get started, follow these steps:
- Log in to WebFile. From the eSystems menu, select WebFile / Pay Taxes and Fees.
- If your business account is already listed, select the 11-digit taxpayer number next to your business name. If your account is not yet listed, enter your 11-digit taxpayer number.
- Select “File a No Tax Due Information Report” and enter the report year.
- Complete the report. You’ll be asked to select the reason your business doesn’t owe tax (i.e. annualized revenue below the No Tax Due Threshold). You’ll also need enter your total revenue amount, and manager/member or director/officer information for your company.
- 70 percent of your margin
- Total revenue minus the cost of goods sold (COGS) deduction
- Total revenue minus compensation
- Total revenue minus $1 million.
5. Fees & Penalties For Late Filing
There are a number of different fees and penalties your business may be subject to if you fail to submit your Texas Franchise Tax Report by the deadline.
Regardless of whether a business owes franchise tax, business owners are charged a $50 fee for submitting reports after the due date.
Additionally, if your business does owe a franchise tax payment, and your payment is 1-30 days late, a fine will be assessed in the amount of 5% of your total tax due. For reports received more than 30 days past the deadline, the penalty jumps to 10%.
If the Comptroller’s office does not receive your franchise tax report (and payment, if you owe one) within 45 days of the deadline, they are required by law to forfeit your business’s right to transact business in Texas. This forfeiture is essentially a loss of corporate liability protection: business owners will become liable for the debts of the business, and the entity will not be permitted to defend itself in a court of law.
If a business’s franchise tax report is overdue by 120 days or more, the Texas Secretary of State may terminate the business’s registration in Texas.
The best way to avoid administrative and financial headaches is to file your franchise tax report on time (or better yet, early) every year. You can enlist us to help you stay on top of due dates—our registered agent service includes helpful reminders about your upcoming franchise tax report.
6. How to Apply For an Extension
First and second extensions are available for taxpayers who need extra time to submit their franchise tax reports. Note—they do not extend payment due dates.
The first extension gives taxpayers until August 15 to submit their franchise tax reports. If the business owner is unable to meet this August deadline, they can request a second extension, which moves the deadline to November 15. Extensions are requested using Texas Form 05-164. Keep in mind that in order for an extension request to be granted, it needs to be submitted or postmarked on or before the due date in question, and 90 percent of the tax due must be paid along with the extension request.
7. About Our Texas Franchise Tax Report Service
While we’re not a tax preparation service, Independent Texas Registered Agent can provide expert, timely filing of your business’s No Tax Due Information Report for a flat fee of $100. Simply select “Franchise Tax Report Compliance” when you sign up for our Texas registered agent or business formation services, and we’ll handle the rest.
Before your annual report is due, we will send a notice to your client account reminding you of the upcoming due date. We’ll automatically file the franchise tax report for you. Our filing service ensures that your business doesn’t miss this all-important deadline, and also helps everyone in your company to maintain their privacy. Members, directors, officers—we leave everyone’s personal addresses off of the Public Information Report, populating our Texas business address in every address field instead.
If you add our franchise tax compliance service at checkout and decide to go the DIY route later, that’s fine too. You can cancel our franchise tax filing service at any time with one click in your online account.
8. Texas Franchise Tax FAQ
The Texas Franchise Tax is complex, but we’re here to help. Here are the most common questions we receive about the franchise tax.
- Do I need to submit an initial franchise tax report for my new business? No. Since 2009, Texas has not required any taxable entities to submit an initial report. Your business’s first Texas Franchise Tax Report due date is May 15 of the year after the year in which the business was approved.
- How can I check my business’s Texas Franchise Tax status? You can check on the Texas Franchise Tax account status of your company (or another company) by conducting an online Taxable Entity Search on the Comptroller’s website. To search for a business, enter its name, 11-digit Texas taxpayer ID number, 9-digit Federal Employer Identification Number (FEIN) or Texas SOS file number. Once you locate the business you’re looking for, click on the blue “Details” button to the left of the business name. Under the “Franchise Search Results” tab, you’ll see an item called “Right to Transact Business in Texas.” If the right to transact business is “Active,” then the entity is still entitled to conduct business in Texas.
- Where can I find Texas Franchise Tax forms (& more information)? If you need to submit your franchise tax report by mail—or if you’d simply like to view a specific form before beginning the WebFile process—visit the the Comptroller’s Texas Franchise Tax Report Forms page. Here you’ll find all of the relevant documents you may need to file, in fillable, downloadable PDF format. For further questions, call the Comptroller’s toll-free franchise tax assistance line at 800-252-1381, or visit the Franchise Tax Frequently Asked Questions page.
Hire Us For Expert
As you’ve probably deduced from this guide, filing your annual franchise tax report—on time and correctly—is a pretty big deal. But it’s also something that could slip your mind in the day-to-day rush of running your company.
When you hire Independent Texas to form your Texas company or serve as your registered agent, we keep your state correspondence organized, send you multiple reminders ahead of the franchise tax due date, and provide affordable franchise report filing service.
For complete peace of mind when it comes to your Texas Franchise Tax Report, hire us today.