One of the most common questions new and prospective business owners ask is whether Texas imposes a state tax on business entities. The short answer is yes, but the Texas franchise tax is structured to be incredibly business friendly. In fact, most small entities owe nothing at all. However, knowing what must be filed and when is crucial to staying in compliance and keeping your entity in good standing.
Texas Franchise Tax: A Business Privilege Tax
Texas does not impose a traditional corporate income tax. Instead, it levies a franchise tax under Texas Tax Code Chapter 171. This is a tax for the privilege of doing business in Texas and applies to most domestic and foreign entities that operate in the state, including LLC’s, corporations, and partnerships.
Despite its name, the franchise tax has nothing to do with food chains or franchising agreements. It is simply Texas’s version of a business entity tax. However, many small businesses never pay a cent because of a generous revenue threshold.
The No Tax Due Threshold: Great News for Small Businesses
As of 2024 and continuing through at least 2025, the no tax due threshold for the Texas franchise tax is $2,470,000 in annual revenue. If a business’s total revenue is less than this amount, it owes nothing under the franchise tax.
Previously, even businesses that owed no tax were still required to file a no tax due report. Failing to do so could result in penalties or even forfeiture of the entity by the Texas Comptroller. Thankfully, the law has changed. Entities under the revenue threshold no longer need to file that report beginning in 2024. This update greatly simplifies compliance for small business owners.
What Still Needs to Be Filed
Even though the franchise tax burden has been reduced, businesses are still required to submit a Public Information Report (PIR) every year. This report includes details about the entity’s governing persons, such as directors, managers, or members, and is essential to maintaining good standing with the state.
Neglecting to file the PIR can result in forfeiture of the entity's legal status. Restoring a forfeited entity often requires legal assistance, which can become both time consuming and costly.
Conclusion
Texas does impose a tax on business entities, but it is designed with small business flexibility in mind. With a high revenue threshold and streamlined filing requirements starting in 2024, Texas remains a business friendly state for entrepreneurs. Still, keeping up with required reports is essential for staying in compliance and avoiding administrative headaches.
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