Texas does not impose a state income tax on businesses or individuals. There is no corporate income tax, no personal income tax on pass-through earnings, and no separate business income tax at the state level. What Texas does have is the franchise tax, which functions as the state’s primary way of taxing businesses.

The franchise tax applies to most entities doing business in Texas. That includes corporations, LLCs, limited partnerships, and other legal entities registered with the state. Sole proprietorships and general partnerships owned entirely by natural persons are generally exempt. If you formed an LLC or a corporation, you fall under the franchise tax regardless of whether you actually owe anything.

The franchise tax is calculated on “taxable margin,” not on net income. This is where it differs from a traditional income tax. You can calculate your margin using whichever of these methods results in the lowest amount owed: total revenue minus cost of goods sold, total revenue minus total compensation, or total revenue multiplied by 70%. The tax rate is 0.75% for most businesses and 0.375% for qualifying wholesalers and retailers.

There is a no-tax-due threshold that matters for smaller businesses. For recent report years, businesses with annualized total revenue at or below roughly $2.47 million owe no franchise tax. But owing nothing does not mean you can skip the filing. Texas requires annual franchise tax reports from all taxable entities, and failing to file can lead to penalties. If you go long enough without filing, the Comptroller’s office can forfeit your entity’s right to transact business in Texas. Getting that reinstated involves clearing up all outstanding reports and paying any penalties.

The filing deadline is May 15 each year, not April 15 like federal returns. The report covers the prior year’s financial activity. Even a brand new LLC that had no revenue needs to file its initial report and then continue filing annually.

One thing business owners sometimes overlook is that while Texas doesn’t tax income at the state level, you still owe federal income tax on your business earnings. And if your business sells taxable goods or services, you also have Texas sales tax obligations on top of the franchise tax. Working with a Houston bookkeeping partner who understands these overlapping requirements helps make sure nothing gets missed.

If you’re unsure whether your entity needs to file, or you want help making sure your business tax returns are handled correctly at both the federal and state level, it’s worth getting professional guidance rather than guessing. The franchise tax itself is usually not a large amount for smaller businesses, but the consequences of ignoring it can create real headaches down the road.