Texas Corporation Taxes (2026)

Overview: No State Income Tax, But Franchise Tax Applies

Texas imposes no corporate income tax on your business profits. However, if you form a corporation in Texas, you must pay the franchise tax based on your taxable margin—not your gross revenue. This tax applies to most for-profit corporations doing business in Texas, with limited exceptions. Understanding the rate structure, filing deadlines, and exemptions is essential to managing your tax liability.

Franchise Tax Rate Structure

Your corporation's franchise tax rate depends on your business classification. Under Tex. Tax Code Ch. 171, the standard rate is 0.75% of taxable margin. If your corporation is primarily engaged in retail or wholesale trade, you qualify for a reduced rate of 0.375% of taxable margin.

To qualify for the retail/wholesale rate, your total revenue from retail or wholesale activities must exceed revenue from other trades, and less than 50% of your retail/wholesale revenue can come from products you produce (or that affiliated entities produce). You also cannot provide retail or wholesale utilities, including telecommunications, electricity, or gas.

An alternative EZ computation rate of 0.331% is available if you meet specific criteria. Compare all three rates to determine which produces the lowest tax liability for your business.

Revenue Threshold: The $2,650,000 Exemption

You owe no franchise tax if your annualized total revenue does not exceed $2,650,000 for the 2026 reporting period. This threshold is adjusted annually under Tex. Tax Code § 171.006. Even if you exceed this threshold by a small amount, you must file an annual report and pay tax on your taxable margin.

If your computed tax is less than $1,000, you owe no tax and are not required to pay. However, you may still be required to file an annual report to maintain compliance.

Taxable Margin: How It's Calculated

Taxable margin is not the same as gross revenue. Under Tex. Tax Code § 171.101, your corporation computes total revenue by starting with specific line items from your federal Form 1120 (or variants like Form 1120-S for S corporations). You then subtract allowable deductions, including:

Bad debt expensed for federal income tax purposes
Foreign royalties and foreign dividends
Net distributive income from partnerships or S corporations
Items of income from disregarded entities
Dividends and interest from federal obligations

Your corporation may also elect to subtract cost of goods sold (under § 171.1012) or compensation (under § 171.1013) to reduce taxable margin. These elections can significantly lower your tax liability.

Cost of Goods Sold (COGS) Deduction

If your corporation manufactures, produces, or sells tangible personal property, you can subtract cost of goods sold to reduce taxable margin. Under Tex. Tax Code § 171.1012, COGS includes direct costs such as:

Labor costs
Materials integral to production
Handling, storage, and inbound transportation
Depreciation and amortization (as reported on your federal return)
Equipment rental or leasing for production
Repair and maintenance of production equipment
Research, experimental, and design costs directly related to production

COGS does not include selling costs, outbound transportation, advertising, interest, income taxes, officers' compensation, or strike expenses. Your corporation must determine COGS using the same method applied on your federal income tax return.

You may also deduct up to 4% of indirect overhead costs allocable to production, such as accounting, legal, and data processing services directly supporting goods acquisition or production.

Compensation Deduction

Your corporation can subtract wages and cash compensation paid to officers, directors, owners, partners, and employees, plus the cost of employee benefits (health care, workers' compensation, retirement contributions). Under Tex. Tax Code § 171.1013, "wages and cash compensation" includes:

Amounts in the Medicare wages box of Form W-2
Net distributive income from partnerships (if the recipient is a natural person)
Net distributive income from S corporations (if the recipient is a natural person)
Stock awards and stock options deducted federally

Critical limitation: You cannot deduct more than $300,000 per 12-month period for any single person. If that person receives compensation from multiple entities in your combined group, the combined group cannot exceed $300,000 total for that person.

You also cannot deduct wages paid to undocumented workers or to employees whose primary employment is at a federally owned or leased facility housing armed forces members.

S Corporation vs. C Corporation Taxation at State Level

Texas recognizes S corporation elections made at the federal level under Tex. Tax Code § 171.101(c)(1). An S corporation files Form 1120-S federally and is treated as a corporation for Texas franchise tax purposes—not as a pass-through entity. Your S corporation must compute taxable margin using the same rules as a C corporation, including the ability to subtract COGS and compensation.

The key difference: at the federal level, an S corporation's income passes through to shareholders and is taxed on their individual returns. In Texas, the S corporation itself pays franchise tax on its taxable margin. There is no separate "S corporation tax rate" in Texas—your S corporation pays either 0.75% or 0.375% depending on whether it qualifies as a retail/wholesale business.

Federal Tax Obligations and Estimated Payments

Your corporation must file a federal income tax return (Form 1120 or Form 1120-S) and pay federal income tax on its taxable income. Texas does not impose state income tax, but you remain subject to federal taxation.

If your corporation expects to owe federal income tax, you must make estimated tax payments to the IRS on the following dates:

April 15
June 15
September 15
January 15 (of the following year)

These federal deadlines are separate from Texas franchise tax deadlines. Failure to make estimated payments can result in federal penalties and interest.

Annual Report and Franchise Tax Filing Deadline

Your corporation must file an annual franchise tax report with the Texas Comptroller of Public Accounts by May 15 each year. Under Tex. Tax Code § 171.2001, the report must include:

Financial information necessary to compute taxable margin
Names and addresses of officers and directors
Name and address of your registered agent
Other information required by the Comptroller

The report is filed on forms supplied by the Comptroller. You can file online at https://comptroller.texas.gov.

If you cannot file by May 15, you may request an extension. The Comptroller grants extensions to November 15 (for entities not required to use electronic funds transfer) or August 15 (for entities required to use electronic funds transfer), provided you remit at least 90% of the estimated tax due with your extension request.

Tax Payment Methods and Deadlines

Your franchise tax is due on the same date as your annual report: May 15. You can pay by check, electronic funds transfer, or online through the Comptroller's website. If you request an extension, you must remit the extended payment by the extended deadline (November 15 or August 15, depending on your payment method requirements).

Penalties apply if you underpay or fail to file. If you file an amended federal return that changes your taxable margin, you must file an amended Texas franchise tax report within 120 days of the federal change becoming final.

Nonprofit and Tax-Exempt Corporations

If your corporation is exempt from federal income tax under Internal Revenue Code § 501(c)(3), (4), (5), (6), (7), (8), (10), or (19), you are exempt from Texas franchise tax. Under Tex. Tax Code § 171.087, you must provide the Comptroller with a copy of your IRS exemption letter.

If you have applied for federal exemption but have not yet received the IRS letter, you can claim provisional exemption by filing evidence of your good-faith application within 15 months of your charter date. Once your federal exemption is finally established, your state exemption is recognized retroactively to your charter date.

Insurance companies, title insurance companies, and farm mutuals are also exempt from franchise tax under Tex. Tax Code § 171.0871.

Formation and Annual Compliance Costs

Forming a corporation in Texas costs $300 (filing fee for the Certificate of Formation under Tex. Bus. Org. Code Ch. 21). There is no annual report fee for maintaining your corporation—you pay only the franchise tax based on your taxable margin.

You must maintain a registered agent in Texas and file any amendments to your Certificate of Formation with the Secretary of State. These filings may incur additional fees depending on the nature of the amendment.

Sales Tax Obligations (Separate from Franchise Tax)

While not a corporate income tax, Texas imposes a 6.25% state sales tax on the sale of tangible personal property. Local jurisdictions can add up to 2%, bringing the maximum combined rate to 8.25%. If your corporation sells taxable goods in Texas, you must register for a sales tax permit at https://comptroller.texas.gov/taxes/sales/.

Sales tax is collected from customers and remitted to the Comptroller—it is separate from and in addition to franchise tax. You cannot deduct sales tax collected from customers as a business expense.

Credits and Deductions: Clean Energy and Research

Your corporation may qualify for a clean energy project credit under Tex. Tax Code § 171.9201 if you implement a carbon capture and sequestration project. The credit equals the lesser of 10% of total capital costs or $100 million, and can be carried forward for up to 20 years.

The Comptroller also allows a research and development credit for qualified research expenses. These credits reduce your franchise tax liability dollar-for-dollar (subject to limitations) and can provide significant savings if your business qualifies.

Amended Returns and Audit Adjustments

If the IRS adjusts your federal taxable income or you file an amended federal return, you must file an amended Texas franchise tax report within 120 days of the federal change becoming final. Under Tex. Tax Code § 171.2011, failure to file an amended report triggers a 10% penalty on the unreported tax.

Keep detailed records of all federal adjustments and maintain copies of IRS correspondence. The Comptroller may audit your franchise tax return and request documentation supporting your COGS and compensation deductions.

Key Takeaways for 2026

No state income tax: Your corporation pays franchise tax on taxable margin, not gross profit.
Rate: 0.75% standard; 0.375% for retail/wholesale businesses.
Threshold: No tax if revenue ≤ $2,650,000 (2026 threshold).
Filing deadline: May 15 annually; extensions available to November 15 or August 15.
Deductions: Subtract COGS and/or compensation to reduce taxable margin.
S corps: Taxed at state level like C corporations; no pass-through treatment in Texas.
Compliance: File annual report, maintain registered agent, and keep records for audit.

For current rates, forms, and filing information, visit the Texas Comptroller of Public Accounts at https://comptroller.texas.gov.