TEXAS FRANCHISE TAX CALCULATOR

Calculate Your Texas Franchise Tax

The Texas Franchise tax is rumored to be a bigger burden on companies than corporate income tax in other states. In our experience, that’s usually because companies aren’t calculating their Texas Franchise Tax in the most efficient manner.
There are five calculation methods – using our free tool, you’ll get a preview of your tax obligation for all five methods. If you need help understanding your results, get in touch with us.
Total Revenue
If under $1.18M, no Texas franchise tax due.
Total Direct Cost of Goods Sold (if eligible)
Leave blank if not eligible, generally must sell a tangible good to qualify
Total Indirect Cost of Goods Sold
Include total amount of overhead expenses and calculator will apply 4%. See 3.588(f) and (g) for exclusions.
Total W2 Compensation
Total W2 wages capped at $390K per person.
Total Net Distributive Income (NDI)
Owner K1 or Schedule C Income - capped at $390K per person.
Total Employee Benefits
Include health costs, retirement contributions & workers comp NOT already included in W2 total.
Percentage of sales apportioned to Texas
Leave blank if 100%
Are you a qualifed wholesale or retail business under Rule 3.584?
Yes
No
Where should we send your results?
Privacy Disclaimer: This information will be used to calculate your Texas Franchise Texas estimates and will not be shared with any third parties.

Texas Franchise Tax FAQs

With Bloomberg reporting that large tech companies and hedge funds are moving operations to Texas for “lower taxes”, there must be a good reason, right? While it’s true that there is no Texas income tax, businesses do still have state tax obligations, namely the Texas Franchise Tax.

What is Texas franchise tax?

Texas is one of only six states that do not have a corporate income tax. Texas businesses are instead required to pay a franchise tax – companies pay what is basically an annual fee to Texas for the privilege of doing business in the state. It is a tax on revenue and is less than 1%.

Who pays Texas franchise tax?

All taxable entities formed, organized, or doing business in Texas, with revenue over $1.18M, are subject to the franchise tax. Exceptions include sole proprietorships not registered as an LLC, passive partnerships, and certain non-profits and trusts.

What are the Texas franchise tax rates?

For 2020 and 2021 the tax rates are as follows:

  • Revenue < $1.18M – No franchise tax due
  • Revenue > $1.18M – 0.375% for Retail or Wholesale; 0.75% for all other industries

How is the Texas franchise tax calculated?

The Texas franchise tax calculation is based on margin, which can be calculated using one of the following methods:

  • Total revenue times 70%
  • Total revenue minus cost of goods sold (COGS)
  • Total revenue minus compensation
  • Total revenue minus $1M

or

  • EZ Computation* – Total revenue times apportionment factor, then apportioned total revenue times tax rate of 0.331%. Only businesses with an annualized total revenue of $20M or less qualify for EZ Computation

What businesses does the Texas franchise tax impact the most?

Service industries, especially those with a low employee count, are generally the most affected by the Texas franchise tax as they do not have a COGS deduction. Manufacturing and retail, on the other hand, do have the COGS deduction as well as the advantage of a reduced 0.375% tax rate, both of which help minimize their tax burden.

Do you have to pay Texas franchise tax if you’re not headquartered in Texas?

As of January 1st 2020, out-of-state taxable entities with annual gross receipts over $500,000 from business in Texas must file a Franchise Tax Report even if the entity has no physical presence in this state.

What is the biggest mistake businesses make when filing their Texas franchise tax?

As a general rule, businesses need to keep good records of two key components: sales by state and cost of goods sold (both direct and indirect). This will ensure that when it’s time to file, the most optimal method to calculate the franchise tax due can be used. This will also help avoid some of the other common mistakes we’ve seen, such as:

  • Missing exclusions for Medicaid and Medicare income (for medical providers)
  • Not structuring commission agreements so that the commission expense is an exclusion
  • Double counting income that was already reported on a flow-through franchise return
  • Not realizing some real estate providers may qualify for the COGS deduction
  • Not applying the reduced 0.375 rate for retailers and wholesalers

Calculation methods, available credits, billing/contracting changes…it’s a lot to think about. Working with a Texas CPA, like Austin CPA David French, can set you on the right path to painlessly filing your 2022 Texas Franchise Tax Report.

Our Texas CPA Firm’s mission is to help clients create generational wealth through tax strategy.

We focus on building meaningful relationships and take the time to understand who you are and where you want to go. This passion for helping others comes from our founder’s personal journey. Mentors, coaches, teachers, and family members have all pushed David back on track at various times throughout his early life. Without the guidance of others, especially through the toughest of times, our firm would not exist today. A strong resolve and great perspective is what you’ll find in our organization. This allows us to help others through challenges of all shapes and sizes.

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“After working with the same accountant for 25 years, upon retiring she recommended David French. As I pivot from starting companies to investing in companies, I need a CPA who can help me think strategically about the implications of my investments. David French has been a great value-add as an advisor and consultant.”

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At David French & Associates, we help thousands of business owners, serial entrepreneurs and investors build a tax strategy that keeps their businesses thriving in Texas. The Texas Franchise Tax is a big part of that. Once our clients understand their obligation, as a leading Austin CPA firm, we help them make decisions all year long that reduce that burden, optimize exemptions and credits, and set them up for future business developments.

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