No corporate income tax doesn't mean no state business tax. Most Texas corporations, LLCs, and partnerships still owe the state's franchise tax, plus sales tax, payroll tax, and the federal income tax the IRS collects no matter where you're based.
This guide covers what Texas actually taxes in 2026: franchise tax rates and thresholds, sales and use tax, federal C corp and S corp treatment, and how LLCs fit into the picture. Rates and thresholds shift from year to year, so confirm current figures with the Texas Comptroller and the IRS before you file anything.
Key Takeaways
- Texas skips a conventional corporate income tax, but franchise tax still applies to most taxable entities doing business there.
- Franchise tax liability depends on entity type, total revenue, taxable margin, and the no-tax-due threshold.
- Sales tax, payroll tax, federal income tax, and property tax apply regardless of your franchise tax outcome.
- Filing obligations often remain even when calculated franchise tax is zero.
What Is the Texas Corporate Tax Rate in 2026?
Texas has no net-income-based corporate tax. Instead, it levies a franchise tax, a privilege tax charged for the right to do business or be formed in the state.
The distinction matters: a corporate income tax taxes net profit, while Texas franchise tax taxes a "margin" calculated from revenue, not your bottom-line federal profit.
This is why Texas shows up oddly in national tax comparisons. Rankings built around corporate income tax rates list Texas at 0%, which is accurate but incomplete. The franchise tax is a margin-based regime that doesn't translate neatly into a comparable income-tax percentage.
Here's what applies for the 2026 report year:
| Item | 2026 Amount | Applies To |
|---|---|---|
| Standard franchise tax rate | 0.75% | Apportioned taxable margin |
| Retail/wholesale rate | 0.375% | Businesses meeting retail/wholesale tests |
| No-tax-due threshold | $2,650,000 | Annualized total revenue |
| E-Z computation rate | 0.331% | Apportioned total revenue, no deductions |
| E-Z eligibility ceiling | $20,000,000 | Annualized total revenue |
| Compensation deduction cap | $480,000 per person | Per 12-month period |
Which entities fall under this tax?
Taxable entities include:
- Corporations, S corps, and LLCs (including single-member LLCs)
- Limited partnerships, LLPs, and professional associations
- Most other taxable entities formed in or doing business in Texas
Sole proprietorships and general partnerships entirely owned by natural persons are excluded. Single-member LLCs do not get that pass, which catches plenty of first-time filers off guard.
One more distinction worth nailing down: franchise tax is a cost the business absorbs itself, calculated off its own revenue and margin. Sales tax, by contrast, is collected from the customer at the point of sale and remitted to the state. A business can owe both, but the mechanics are entirely separate.
How Texas Franchise Tax Works
Taxable Margin vs. Federal Taxable Income
Your US federal taxable income and your Texas taxable margin are different numbers, built from different formulas. US federal taxable income subtracts actual business expenses from revenue. Texas margin uses one of several standardised calculations, so it's entirely possible to owe franchise tax in a year your US federal return shows a loss.
| Method | How It's Calculated |
|---|---|
| Cost of goods sold | Total revenue minus allowable COGS |
| Compensation | Total revenue minus wages/cash compensation and benefits |
| Percentage | 70% of total revenue |
| Flat deduction | Total revenue minus $1,000,000 |
You use whichever method produces the lowest margin; these are alternatives, not stackable deductions. The E-Z computation (0.331% of apportioned revenue) is a separate, simpler path, but it drops the COGS and compensation deductions along with any credits.
Qualifying for the Retail/Wholesale Rate
The 0.375% rate isn't automatic. An entity has to clear three tests:
- Revenue mix - retail/wholesale revenue exceeds revenue from any other trade the business runs.
- Production test - less than 50% of that retail/wholesale revenue comes from products the entity or an affiliate actually produces (restaurants get a carve-out here).
- Utility exclusion - the business isn't a retail utility, including telecom, electricity, or gas.
No-Tax-Due Doesn't Mean No Filing
Clear the $2.65 million threshold and you won't owe franchise tax. But Texas has done away with the standalone No Tax Due Report for recent report years. Entities at or below the threshold still generally file a Public Information Report or Ownership Information Report. Skipping that step is a surprisingly common compliance mistake.
Apportionment and Combined Reporting
Businesses operating inside and outside Texas apportion based on Texas receipts divided by total receipts everywhere. Goods are sourced to where they're shipped; services to where they're performed; software sales to the payer's legal domicile.
Affiliated entities under common control, more than 50% ownership, running a unitary business typically file one combined report instead of separate ones, using a single margin method for the whole group.
Filing basics: Annual reports are due May 15, 2026, filed through Webfile or paper forms 05-158 (long form) or 05-169 (E-Z), alongside the required information report. A report is generally due even when the calculated liability is zero.
Other Texas Business Taxes to Consider
Franchise tax is just one piece of the picture. Depending on what you sell and where, several other taxes can apply.
Sales, Use, and Remote-Seller Rules
Texas charges a 6.25% state sales tax on taxable goods, leases, rentals, and many services. Cities, counties, transit authorities, and special districts can add up to 2% more, pushing combined rates as high as 8.25% in some areas.
Use tax applies to purchases where the seller didn't collect Texas sales tax, such as equipment, software, or inventory bought out of state and used in Texas. The purchaser owes the same combined rate directly to the state.
Selling into Texas without a physical location there doesn't excuse you from this. Under Texas's remote-seller rules, a business with $500,000 or more in Texas revenue over the preceding 12 calendar months must register and begin collecting. Collection typically starts by the first day of the fourth month after you cross the threshold.
Other Obligations to Watch
- Employer payroll taxes, including withholding and unemployment contributions
- County business personal property tax on income-producing equipment and inventory
- Hotel occupancy tax (6% state, plus local add-ons) for lodging businesses
- Motor fuel tax for businesses handling gasoline or diesel
- Alcohol, tobacco, or other industry-specific excise taxes
Texas also offers exemptions and incentive programs for certain industries or investments, but none of these apply automatically. Eligibility depends on the specific program and documentation requirements, so check current rules before assuming a credit applies to your business.
How Entity Type Affects Federal and Overall Tax Liability
Skipping Texas corporate income tax doesn't touch your federal bill. The IRS taxes income regardless of state. How much you owe, and who owes it, depends heavily on entity structure.
| Entity | Federal Treatment |
|---|---|
| C corporation | 21% flat rate on taxable income |
| S corporation | Pass-through to shareholders; limited built-in-gains exceptions |
| Partnership | Pass-through via Schedule K-1 to partners |
| LLC (default) | Disregarded or partnership; can elect corporate taxation |
The federal C corporation rate is a flat 21% of taxable income under IRC Section 11(b), confirmed in IRS Publication 542. That figure is separate from Texas franchise tax math entirely.
Why Pass-Through Status Changes the Math
S corps, partnerships, and most LLCs don't pay federal income tax at the entity level. Profits flow to owners' personal returns instead. That shifts the burden to the owner, who may also owe self-employment tax (15.3% combined Social Security and Medicare) on applicable earnings, plus quarterly estimated payments.
There's No Single "LLC Tax Rate"
This trips up a lot of founders. An LLC's actual bill depends on:
- Its federal election (disregarded, partnership, or corporation)
- Texas franchise tax exposure based on revenue and margin
- Whether it sells taxable goods or services subject to sales tax
- Payroll obligations if it has employees
Two Texas LLCs with identical revenue can owe completely different totals once federal elections and activity enter the equation.
Employer and Cross-Border Considerations
Employers handle federal withholding, Social Security and Medicare contributions, and federal unemployment tax, reported through Forms 941, 940, W-2, and 1099-NEC. Foreign-owned or multinational businesses carry extra layers: information reporting, foreign qualification in Texas, related-party documentation, and sometimes treaty or transfer-pricing rules. Those situations usually need specialized advice rather than a general overview.
Entity formation and compliance support matter most when these layers stack up. VJM Global has worked with American business owners on LLC, C-corp, and S-corp registration, EIN setup, payroll compliance, and corporate return filing across Forms 1120, 1120-S, and 1065. That includes businesses operating across multiple states, not just Texas.
2026 Texas Corporate Tax Compliance Checklist
Getting Set Up
- Register your entity with the Texas Secretary of State
- Obtain an EIN from the IRS
- Register with the Texas Comptroller for franchise tax and sales tax permits, where applicable
- Set up payroll systems before your first hire
- File BOI reports with FinCEN where required
- Build bookkeeping that separates Texas receipts from out-of-state revenue
Records to Keep for Franchise Tax
Accurate filing needs clean records of:
- Gross receipts and Texas-sourced receipts
- Cost of goods sold and compensation figures
- Ownership information and intercompany transactions
- Sales tax collected
Key 2026 Dates to Verify
| Filing | Deadline |
|---|---|
| Texas franchise report | May 15, 2026 |
| Form 1120-S / Form 1065 | March 16, 2026 |
| Form 1120 | April 15, 2026 |
| Corporate estimated payments | April 15, June 15, September 15, December 15, 2026 |
Confirm these against the Texas Comptroller and IRS before filing. Deadlines shift for fiscal-year filers and weekend holidays.
Common mistakes to avoid:
- Assuming no income tax means no state filing obligation
- Confusing franchise tax rules with sales tax rules
- Using last year's revenue threshold instead of the current one
- Missing combined-reporting requirements for affiliated entities
- Misclassifying taxable services
- Ignoring remote-seller nexus until it's already triggered
Managing this across multiple states, or alongside an India or Australia-linked structure, gets complicated fast. VJM Global supports international and US-linked businesses with accounting, tax compliance, financial reporting, and cross-border advisory, though every business should get advice tailored to its own entity type and operations before filing.
Frequently Asked Questions
Is there a corporate tax rate in Texas?
Texas has no conventional state corporate income tax. Most taxable entities, though, still owe franchise tax based on their margin, plus sales, payroll, and federal taxes. Confirm current 2026 rules with the Texas Comptroller before filing.
How much tax does an LLC pay in Texas?
There's no flat LLC tax amount. It depends on the LLC's federal election, revenue, franchise tax margin calculation, sales activity, and payroll obligations. Two LLCs with similar revenue can owe very different totals.
What is the C corp tax rate in the US?
The federal corporate income tax rate is a flat 21% of taxable income under IRC Section 11(b). This applies on top of, not instead of, Texas franchise tax and other state-level obligations.
