Texas — Corporate Income / Franchise Tax

Texas does not impose a traditional corporate income tax. Instead, Texas imposes a franchise tax on each taxable entity that does business in Texas or that is chartered or organized in Texas. The tax applies regardless of federal tax classification — for example, LLCs and partnerships generally qualify as "taxable entities" even though they are pass-through entities for federal income tax purposes.

A "taxable entity" is broadly defined to include partnerships, limited liability partnerships, corporations, banking corporations, savings and loan associations, limited liability companies, business trusts, professional associations, business associations, joint ventures, joint stock companies, holding companies, and other legal entities. The definition excludes sole proprietorships, general partnerships owned entirely by natural persons without limited liability protection, passive entities meeting specific income composition tests, and entities exempt under specific statutory exemptions.

The tax extends to the limits of the United States Constitution and federal law.

Source: Tex. Tax Code § 171.001 | Tex. Tax Code § 171.0002

Texas imposes franchise tax at different rates depending on the type of business conducted by the taxable entity.

The standard rate is 0.75 percent of taxable margin for most taxable entities. Taxable entities primarily engaged in retail or wholesale trade pay a reduced rate of 0.375 percent of taxable margin. Both rates are subject to constitutional voter-approval requirements for any future increases and are also subject to the alternative EZ Computation rate under Section 171.1016 for entities that qualify and elect that method.

"Taxable margin" is the tax base and is determined separately under margin computation rules in Chapter 171. The rate is applied to the taxable margin after it has been calculated and apportioned to Texas.

Source: Tex. Tax Code § 171.002

Texas taxable entities calculate margin by selecting the lowest result from these options: (1) 70 percent of total revenue; (2) total revenue minus $1 million; or (3) total revenue minus either cost of goods sold or compensation (entity elects one, not both). After computing margin, the entity apportions it to Texas using a single-receipts formula, then subtracts any other allowable deductions to determine taxable margin. Cost of goods sold and compensation are defined in sections 171.1012 and 171.1013, respectively.

Source: Tex. Tax Code § 171.101

A taxable entity owes no franchise tax if its annualized total revenue is $2.47 million or less for the 12-month period on which margin is based. The threshold is adjusted biennially for inflation. For reports due on or after January 1, 2024, an entity at or below this threshold is not required to file a No Tax Due Report but must file a Public Information Report (Form 05-102) or an Ownership Information Report (Form 05-167) depending on entity type.

Source: Tex. Tax Code § 171.002(d)(2) | Tex. Comptroller, Franchise Tax Forms for 2025

Texas apportions a taxable entity's margin using a single-factor formula based exclusively on gross receipts. The apportionment factor is the ratio of the entity's gross receipts from business done in Texas (numerator) divided by its gross receipts from its entire business everywhere (denominator). The entity multiplies its total margin by this fraction to determine apportioned margin subject to Texas tax. Unlike many states, Texas does not consider property or payroll in its apportionment formula.

Source: Tex. Tax Code § 171.106 | Texas Comptroller, Franchise Tax Apportionment FAQs

When the Texas Comptroller determines that a taxable entity owes additional franchise tax, the Comptroller issues a deficiency determination under Tex. Tax Code § 111.008. The Comptroller may make this determination based on information in the taxpayer's report or from any other available information. The statute requires the Comptroller to notify the taxpayer of the determination by mail, electronic means, or personal service. When delivered by mail, service is complete when the notice is deposited in a U.S. Post Office, addressed to the taxpayer at the address appearing in the Comptroller's records.

Petition for redetermination deadline

A taxpayer has 60 days from the date the notice of determination is issued to file a petition for redetermination with the Comptroller. This deadline is mandatory; if the taxpayer does not file within 60 days, the right to redetermination is barred. Tex. Tax Code § 111.009(b) states: "A petition for redetermination must be filed before the expiration of 60 days after the date the notice of determination is issued or the redetermination is barred."

Filing a timely petition for redetermination suspends the collection obligation—the taxpayer does not have to pay the assessed tax, penalties, or interest unless and until the dispute is resolved against the taxpayer. The Comptroller typically reviews the deficiency determination in-house first, allowing the taxpayer to provide additional information. If the matter is not resolved administratively, the Comptroller transfers the case to the State Office of Administrative Hearings (SOAH) for a hearing before an administrative law judge.

Jeopardy determinations

Under certain circumstances—when the Comptroller believes state funds are in jeopardy due to insolvency or fraud—the Comptroller may issue a jeopardy determination rather than a standard deficiency determination. For jeopardy determinations, the tax becomes due and payable immediately, and the taxpayer has only 20 days (instead of the standard 60 days) after the notice is issued to file a petition for redetermination. If the taxpayer does not pay the amount of a jeopardy determination by the date specified for submitting the petition, a 10 percent penalty is automatically assessed.

Protest payment alternative

A taxpayer who wants to bypass the administrative redetermination process may pay the deficiency and file a formal protest letter with the Comptroller. The protest letter must fully and in detail explain why the tax is unlawful or why the Comptroller is not legally allowed to collect it. The protest payment must be made by the later of (1) four years after the tax was due and payable, or (2) six months after the deficiency determination becomes final. After submitting the protest payment and letter, the taxpayer has a 90-day window to file suit in Travis County district court seeking recovery of the payment.

Source: Tex. Tax Code § 111.008 Source: Tex. Tax Code § 111.009

Texas franchise tax appeals follow a two-stage path: first through the State Office of Administrative Hearings (SOAH), then to Travis County District Court. This structure contrasts with the three-tier appeals systems used in states such as California and New York.

Stage 1: Petition for redetermination

A taxpayer disputing a franchise tax deficiency determination files a petition for redetermination with the Texas Comptroller of Public Accounts within 60 days of the notice issuance. Tex. Tax Code § 111.009(b) provides that filing must occur "before the expiration of 60 days after the date the notice of determination is issued or the redetermination is barred." The petition suspends collection—the taxpayer does not have to pay the disputed tax, penalties, or interest unless and until the dispute is resolved against the taxpayer.

Internal Comptroller review

After receiving the petition, the Comptroller typically conducts an internal review, giving the taxpayer an opportunity to provide additional information and documentation to resolve the matter administratively. Many cases settle at this stage. If the dispute cannot be resolved, the Comptroller refers the case to the State Office of Administrative Hearings.

State Office of Administrative Hearings (SOAH)

SOAH is an independent agency in the executive branch that conducts contested-case hearings on behalf of more than 50 Texas agencies. An administrative law judge (ALJ) assigned to the tax case holds a hearing (in-person or via videoconference), receives evidence and testimony, and issues a Proposal for Decision (PFD) that includes findings of fact and conclusions of law. The parties may file exceptions and replies to the PFD under SOAH procedural rules.

Critically, the ALJ's PFD is not binding—it is a recommendation. The case is then remanded to the Comptroller, who reviews the PFD, any exceptions filed by the parties, and the ALJ's response to exceptions. The Comptroller then issues a final Decision, which adopts, modifies, or rejects the ALJ's PFD. The Comptroller's Decision becomes final 25 days after it is signed unless the taxpayer timely files a motion for rehearing. If no motion for rehearing is filed or if a motion is denied, the Decision becomes final and a 10 percent penalty is automatically added if the amount due is not paid within 20 days after the Decision becomes final.

Stage 2: Judicial review in Travis County District Court

After the Comptroller's Decision becomes final, either party may appeal to Travis County District Court. Appeals from SOAH final orders or agency final orders generally lie to the Travis County District Court under the Texas Administrative Procedure Act. The taxpayer must check the specific statute governing the tax type for any special appeal deadlines or requirements. Appeals courts may then review Travis County district court judgments.

Bypass option: protest payment and direct suit

A taxpayer may bypass the administrative redetermination process entirely by paying the deficiency under protest and filing suit directly in Travis County District Court within 90 days of the protest payment. Tex. Tax Code § 111.009 and related provisions authorize this alternative path, which allows the taxpayer to obtain de novo judicial review without first exhausting the SOAH administrative process.

Source: Tex. Tax Code § 111.009 Source: Texas Comptroller, Tax Hearings FAQ Source: SOAH General Information

Texas imposes a four-year statute of limitations for both Comptroller assessments of additional franchise tax and taxpayer refund claims, measured from the date the tax becomes "due and payable." The limitations period begins the day after the last day on which payment is required.

General four-year rule for assessments

Tex. Tax Code § 111.201 provides: "Except as otherwise provided by this subchapter, a tax imposed by this title may not be assessed by the comptroller after four years from the date the tax becomes due and payable." For franchise tax purposes, the operative date is May 16 for reports due May 15 (or the next business day if May 15 falls on a weekend or legal holiday). Tex. Tax Code § 111.204 defines "due and payable" as the day after the last day on which payment is required.

Extension impact on statute commencement

When a taxpayer obtains a valid extension to file its annual franchise tax report, the statute of limitations may begin later than May 16. The Comptroller's April 2024 policy memo (STAR Accession No. 202404001M) clarifies that:

• Non-EFT payers who obtain a valid extension to November 15 by remitting either (1) 100% of the prior year's tax by May 15, or (2) at least 90% of the tax eventually reported as due, have a limitations period beginning November 16.
• Electronic funds transfer (EFT) payers who obtain a valid first extension by remitting at least 90% of the tax eventually reported as due by May 15 have a limitations period beginning August 16, even if they obtain a second extension to November 15. This is because EFT payers must remit 100% of the tax reported as due by August 15 to obtain a second extension, making August 16 the day after the last required payment.

If the taxpayer fails to satisfy the extension requirements, the due date reverts to May 15 and the statute of limitations begins May 16.

Exceptions to the four-year assessment limitation

Tex. Tax Code § 111.201(b) provides that the statute of limitations does not apply—and the Comptroller may assess at any time—if the taxpayer:

1. Files a false or fraudulent return with intent to evade the tax;
2. Fails to file a return; or
3. Files a return with a gross error (defined as an understatement exceeding 25% of the correct amount due).

Refund claims: four-year limitation

Tex. Tax Code § 111.107(a) mirrors the assessment limitation: "A person may file a claim for a tax refund with the comptroller if the claim is filed before the expiration of the applicable period of limitation." Taxpayers have four years from the date the tax was due and payable to file a refund claim. For deficiency or jeopardy determinations, the refund claim deadline is the later of (1) four years after the tax was due and payable, or (2) six months after the deficiency or jeopardy determination becomes final.

Tolling provisions

Tex. Tax Code § 111.207 tolls (suspends) the statute of limitations during:

• The pendency of a refund lawsuit with a protest payment;
• The pendency of a judicial proceeding to determine the amount of tax due;
• The pendency of an administrative redetermination or refund hearing before the Comptroller; and
• The pendency of a Title 11 bankruptcy case.

Tolling applies only to the issues contested in the lawsuit or proceeding. The Comptroller and taxpayer may also agree in writing to extend the limitations period under Tex. Tax Code § 111.203; any single extension may not exceed 24 months from the expiration of the period being extended.

Source: Tex. Tax Code § 111.201 Source: Tex. Tax Code § 111.204 Source: Tex. Tax Code § 111.107 Source: Tex. Tax Code § 111.207 Source: Texas Comptroller STAR Memo 202404001M

Texas offers both a Voluntary Disclosure Agreement (VDA) program for taxpayers with previously unreported liabilities and a private letter ruling process for prospective tax guidance. These programs are administered by separate divisions within the Texas Comptroller of Public Accounts.

Voluntary Disclosure Agreement (VDA) program

The Texas Comptroller's VDA program, administered by the Business Activity Research Team (BART), allows taxpayers to report and pay previously unpaid or underpaid franchise tax (and other Texas taxes) with substantial relief from penalties and interest. Publication 96-576, Voluntary Disclosure Program, establishes the program framework.

Eligibility requirements

To qualify for a VDA, the taxpayer must:

1. Have an unpaid or underpaid liability for a tax administered by the Comptroller (other than International Fuel Tax Agreement taxes);
2. Not have been previously contacted by the Comptroller—either verbally or in writing—concerning the liability or estimated liability; and
3. Not have received notification of an audit or examination.

Taxpayers working with BART on a VDA may not simultaneously request a private letter ruling from Tax Policy regarding the same tax type under 34 Tex. Admin. Code § 3.1(c)(3)(C).

Relief provided

Statutory penalties and interest are waived under a VDA, except interest on taxes collected but not remitted (trust fund taxes). The agreement does not limit the Comptroller's ability to audit the disclosed periods within the statute of limitations. Taxpayers must report and pay the tax correctly going forward from the end date of the agreement.

Look-back period and anonymous filing

Publication 96-576 does not specify a statutory look-back period cap; the VDA covers periods within the four-year statute of limitations measured from the date the tax became due and payable. Initial contact with BART may be made anonymously without naming the business; once preliminary approval is obtained, BART prepares a VDA and sends it to the company representative. After the signed VDA is returned and the taxpayer name disclosed, BART completes the review process and obtains the Audit Division director's signature. The taxpayer then has 60 days from execution to submit tax data and payment as specified in the agreement.

Fast-Track VDA option

Taxpayers who have calculated the tax amount due up front may qualify for a Fast-Track VDA. The taxpayer must meet all standard VDA criteria and submit a completed spreadsheet (sales/use tax) or returns (other taxes). Fast-Track VDAs may not include refund claims or requests for a letter ruling from Tax Policy. The Comptroller processes the reports and payment quickly without reviewing for additional taxes.

Private letter rulings (PLRs)

The Comptroller issues private letter rulings under 34 Tex. Admin. Code § 3.1 to provide written determinations of how Texas tax laws, rules, and policies apply to a specific set of facts presented by a taxpayer. PLRs are prospectively binding on the Comptroller for the person and issue identified in the request, subject to detrimental reliance protections under Rule 3.10, Taxpayer Bill of Rights.

When a PLR will not be issued

The Comptroller will not issue a PLR when:

• The issue is the subject of an audit of the same tax type (though separate tax types may be ruled upon during an audit of another tax);
• A voluntary disclosure agreement is pending for the same person and same tax type;
• An administrative hearing or litigation before the Comptroller is pending for the same or a related person and the same or any previous tax period; or
• Taxability guidance in statutes, rules, or other controlling authorities already exists and is clear (in which case the Comptroller will issue a non-binding general information letter instead).

PLR request procedure

A taxpayer requests a PLR by submitting a written request that includes: (1) a complete statement of facts; (2) identification of the specific statutory or regulatory provisions at issue; (3) an explanation of why existing guidance is unclear or contradictory; and (4) the taxpayer's own analysis and conclusion. Sample PLR requests and issued rulings are available on the Comptroller's website. Taxpayers may contact Tax Help before submitting a request to discuss whether the issue is suitable for a PLR.

Binding effect and modification

For franchise tax purposes, a member of a combined group can rely on a PLR issued to the reporting entity to the extent the ruling relates to that member and the member was identified in the PLR request. The Comptroller may modify or revoke a PLR if it is found to be in error or inconsistent with current policy, but the modification or revocation will not apply retroactively to the person identified in the original request.

Source: Texas Comptroller Publication 96-576, Voluntary Disclosure Program Source: 34 Tex. Admin. Code § 3.1, Private Letter Rulings Source: Texas Comptroller, General Information Letters and Private Letter Rulings Source: Texas Comptroller, Private Letter Ruling FAQ