Introduction
"Exempt" means three different things under the Texas franchise tax. An entity may sit outside the tax entirely, fall below the no-tax-due threshold, or shrink its taxable margin with a deduction. Each outcome carries different paperwork.
The trap catches many owners: owing $0 does not mean filing nothing. Below-threshold entities still file a Public Information Report (PIR) or Ownership Information Report (OIR), and missing it can cost an entity its Texas standing.
This guide covers the 2026 threshold, qualifying entity types, passive entities, deductions, filing duties, and how to verify each figure with the Texas Comptroller.
Key Takeaways
- Annualized total revenue of $2,650,000 or less means no tax due for the 2026 report.
- Below the threshold is not the same as exempt; PIR/OIR filing generally continues.
- Passive status needs 90% qualifying income and an eligible partnership or trust form.
- Above the threshold, compare the four margin methods or EZ Computation.
What the Texas Franchise Tax Exemption Means in 2026
What Texas franchise tax covers
Texas franchise tax is a privilege tax on taxable entities formed in Texas or doing business there. It is generally calculated on margin, not profit. Despite the name, it has nothing to do with running a franchised business.
It also sits alongside other obligations. Sales tax, federal income tax and the franchise tax are separate regimes, so one business can owe all of them or none.
The 2026 no-tax-due threshold
For reports originally due May 15, 2026, an entity owes no tax if its annualized total revenue is $2,650,000 or less, according to the Comptroller's 2026 forms page.
Key points on the revenue measure:
- Total revenue is the prescribed return amounts less Chapter 171 exclusions, not just Texas sales.
- Texas gross receipts are a separate figure, used for apportionment.
- If the accounting period is not 12 months, annualize: period revenue ÷ period days × 365.
- Combined groups add member revenue and eliminate intermember revenue, then test the group total.
Threshold versus a complete exemption
| Position | What it means | Reporting |
|---|---|---|
| Below threshold | Taxable entity, no tax due | PIR/OIR still required |
| Not subject to the tax | Excluded by statute | Depends on the category |
| Using deductions | Taxable, reduced margin | Full report and tax calculation |
The threshold is not permanent. Revenue growth, a change in entity structure or ownership, or new Texas nexus can put you back above it next year.
Which Businesses and Entities May Be Exempt?
Taxable entities that generally fall within the system
Taxable types include:
- Corporations (including S and professional corporations)
- LLCs (including single-member and series LLCs)
- Partnerships, trusts, and professional or business associations
- Joint ventures and certain financial institutions
Federal classification does not control Texas status. A single-member LLC disregarded for federal purposes is still an LLC under Texas law, as the Comptroller's taxable entities FAQ explains.
Entities that may be outside the tax
- Sole proprietorships: excluded, but an LLC does not qualify just by filing federally as a sole proprietor.
- General partnerships: all direct owners must be natural persons, with no limited liability (an LLP registration disqualifies).
- Grantor trusts and estates: owners or beneficiaries must be natural persons or qualifying charities.
- Other trusts: certain self-insurance, Section 401(a) and Section 501(c)(9) trusts.
- Political committees and REMICs: specific unincorporated or statutory conditions apply.
- REITs: relief has direct-real-estate-holding restrictions, and underlying property entities do not inherit it.
These conditions belong to the named entity, not automatically to its affiliates.
Passive-entity qualification
A passive entity must be a general or limited partnership, or a trust other than a business trust, for the entire accounting period. An LLC cannot qualify simply by holding investments.
Income tests:
- At least 90% of federal gross income from qualifying sources.
- No more than 10% from an active trade or business.
Qualifying sources include dividends, interest, foreign-currency gains, qualifying partnership distributive shares, certain investment gains and mineral royalties. Rent and ordinary-income depreciation recapture do not count.
Outsourced operations and assets used in a related entity's active business can count as active. Support the position with:
- Income schedules by category
- Ownership records and partnership agreements
- Federal tax workpapers
Special statutory exemptions
- Nonprofits: must apply to the Comptroller and be approved; reports and tax remain due until then. Forms include AP-204, AP-205 (charitable), AP-206 (homeowners' associations), AP-207 (educational) and AP-209 (religious).
- Veteran-owned businesses: formed in Texas on or after January 1, 2022, 100% owned by honorably discharged veterans, with Texas Veterans Commission verification. Relief covers the initial five years; report any lost eligibility.
- Government-related and other categories: certain political-subdivision corporations, insurance organizations, cooperatives and housing finance corporations have separate conditions.
Nothing here is automatic. Confirm the current rule before relying on any category.
Businesses outside Texas or selling remotely
An out-of-state entity can owe franchise tax through physical presence (employees, inventory, premises) or through economic nexus at $500,000 or more in Texas gross receipts, per the Comptroller's remote sellers guidance.
Franchise nexus is separate from sales-tax collection duties. Nexus, exclusion, approved exemption and revenue relief are four distinct determinations.
What Deductions Can Reduce Texas Franchise Tax?
The four standard margin calculation methods
| Method | Margin |
|---|---|
| 70% method | 70% of total revenue |
| COGS method | Revenue minus qualifying COGS |
| Compensation method | Revenue minus qualifying compensation |
| $1M method | Revenue minus $1,000,000 |
Rates are 0.75% generally and 0.375% for primarily retail or wholesale businesses. Margin is then apportioned using Texas receipts.
Run every method on the same period's revenue and records. Don't pick by industry assumption; a services firm with heavy payroll may beat the $1M method, and a thin-margin distributor may favor COGS.
Allowable cost-of-goods-sold deduction
- Retailers and wholesalers: qualifying acquisition and handling costs.
- Manufacturers: qualifying production costs.
- Contractors: qualifying real-property construction, repair and remodeling subcontract costs.
- Pure services generally do not qualify; mixed transactions need separation.
Selling costs, order fulfillment and salesperson compensation are excluded. Allocable overhead is limited to 4% of total indirect and administrative overhead costs. EY's 2020 case analysis shows how courts reject delivery and rehandling costs.
For 2026, COGS depreciation follows current return amounts, including eligible bonus depreciation. Check the March 2026 STAR memo for the temporary adjustment.
Allowable compensation deduction
- Wages and cash pay to officers, directors, owners, partners and employees qualify.
- Qualifying benefits are separately deductible.
- Natural-person owners' net distributive income can count without distribution.
- 1099 labor and employer payroll taxes do not count.
The 2026 cap is $480,000 per person per 12-month period. Wages and K-1 amounts combine for one individual, and a combined group applies a single cap.
EZ Computation
EZ is available at annualized revenue of $20 million or less, at 0.331% on Form 05-169. It allows no margin deductions or credits, so it suits businesses with few deductible costs.
Records and avoiding overclaims
Keep:
- Revenue ledgers and invoices
- Payroll records
- COGS schedules and overhead support
- Apportionment data and ownership information
- Prior franchise tax filings
Deductions shrink margin; they don't make a taxable entity exempt. Compare calculations with a qualified professional before filing.
How to File When Your Business Owes No Tax
Required reports below the threshold
The No Tax Due Report is discontinued. Ordinary entities at or below $2.65 million file no revenue report, but still file a PIR or OIR:
- Form 05-102 (PIR): corporations, LLCs, limited partnerships, professional associations and financial institutions.
- Form 05-167 (OIR): other taxable entity types.
Update officer, director, manager or partner details. A zero-tax result doesn't protect good standing.
Deadlines and extensions
The filing deadline is May 15, 2026 for tax reports and PIR/OIR filings. Submit extension requests (webfile or Form 05-164) by that date.
- Non-EFT payers: extended to November 16, 2026, with payment of 90% of current tax or 100% of prior-report tax
- EFT payers: first extension to August 17, second to November 16
- Below-threshold PIR/OIR: zero-money extension permitted
Late filing still carries costs even when no tax is due:
- $50 penalty for a late required report
- 5% late-tax penalty, plus another 5% after 30 days
- Interest at prime plus 1% starting 60 days after the due date
Missing a PIR or OIR can lead to forfeiture, including loss of the right to sue or defend in Texas courts.
Combined groups and special situations
A group tests combined annualized revenue. Below the threshold, it files no Affiliate Schedule or Common Owner Information Report, but each Texas-organized or Texas-nexus member files a PIR/OIR.
- Zero Texas receipts above threshold: Long Form 05-158 or EZ, plus PIR/OIR.
- Passive entities: registered ones file a Long Form/EZ affirming status and no PIR/OIR.
- Qualifying REITs: affirm status and still file PIR/OIR.
- New entities: may report short periods; follow the 2026 instructions.
2026 Compliance Checklist and Professional Support
Verification checklist
Before filing, confirm:
- Entity classification and legal form
- Texas nexus
- Accounting period and annualized revenue
- Combined-group status
- Exemption eligibility
- The correct report form
Check the Comptroller's franchise tax page, the 2026 instructions (Form 05-915), the FAQs and STAR for every amount and effective date.
Practical bookkeeping steps
- Track monthly revenue and Texas receipts.
- Separate COGS from ordinary expenses.
- Reconcile payroll and owner payments.
- Keep passive-income documentation all year.
Have an advisor review borderline exemption claims, related-party transactions, passive status and multi-state or international activity.
Support from VJM Global
VJM Global supports US businesses with accounting, tax compliance, financial review and advisory work, including multi-state nexus assessments and return filings.
This article is general guidance, not tax advice. Confirm your position with a qualified professional and the Texas Comptroller before relying on any exemption or filing position.
Frequently Asked Questions
What is the no-tax threshold for Texas franchise tax in 2026?
$2,650,000 of annualized total revenue for the 2026 report. No tax is due at or below it, but a PIR or OIR is generally still required.
What are allowable deductions for Texas franchise tax?
Choose COGS, compensation (capped at $480,000 per person), or the $1,000,000 deduction, or use 70% of revenue. Each has eligibility and documentation rules.
What qualifies as a passive entity for Texas franchise tax?
A partnership or non-business trust for the full period, with at least 90% qualifying income and no more than 10% active-business income. Verify current Comptroller requirements.
Do I still need to file if my Texas franchise tax liability is zero?
Usually yes. Ordinary below-threshold entities file a PIR or OIR, and a missing report can lead to forfeiture. Approved exempt entities are the main exception.
Which businesses are exempt from Texas franchise tax?
Common categories include qualifying sole proprietorships, general partnerships of natural persons, grantor trusts, approved nonprofits and certain statutory entities. Each has specific conditions, and passive entities have their own affirmation duties.
