Texas Franchise Tax 2026: $2.65M No-Tax-Due Threshold, Form 05-158, and the EZ Computation Method
What the Texas franchise tax actually is
The Texas franchise tax is a privilege tax. The state charges it for the right to do business in Texas as a legal entity, which is a separate concept from charging income tax on profits. That distinction matters because the tax base isn’t your net income. It’s your taxable margin, which is computed from gross revenue with one of several deductions applied. You can have a loss on your federal return and still owe Texas franchise tax. You can also have a healthy profit and owe nothing if your revenue is below the no-tax-due threshold. The two numbers don’t track each other the way most owners expect.
The tax applies to most legal entities formed in Texas or doing business in Texas. That includes LLCs, corporations (both C-corps and S-corps for federal purposes), limited partnerships, professional associations, and business trusts. Sole proprietors and general partnerships made up entirely of natural persons are not subject to it. So if you’re a freelancer operating under your own name with no LLC, you don’t file. The moment you form an LLC or incorporate, you’re on the franchise tax rolls until you formally terminate the entity.
Texas Tax Code Chapter 171 is the statutory home of the franchise tax. The Comptroller of Public Accounts administers it, and their site at comptroller.texas.gov is the source of truth for forms, rates, and threshold updates. The threshold adjusts periodically based on inflation. The current figure of $2,650,000 in total revenue applies to reports due in 2024 and forward, and that’s the figure most owners need to memorize when they’re trying to predict whether they’ll owe anything.
Who owes franchise tax and who doesn’t
Every taxable entity formed in Texas or registered to do business in Texas has to file a franchise tax report each year, even if the entity owes zero tax. That’s the part people miss. The filing obligation is separate from the tax liability. If your Texas LLC made $50,000 last year, you owe no franchise tax because you’re well under the $2.65M threshold. But you still have to file a No Tax Due Information Report, which used to be Form 05-163. As of recent legislative changes, entities below the threshold can file a simplified report through the Comptroller’s online Webfile system without sending in a full computation, but the filing itself is still required.
Some entities are exempt outright. Sole proprietorships and general partnerships of natural persons don’t file at all. Passive entities meeting strict tests under Tax Code §171.0003 are exempt, but the definition is narrow and most family LLCs that think they qualify actually don’t. Real estate holding LLCs with active management decisions usually fail the passive test. Veteran-owned businesses formed after January 1, 2022 can claim a 5-year initial exemption under Tax Code §171.0005 if the entity is 100% owned by honorably discharged veterans, but you still file a report to claim the exemption.
Out-of-state entities get caught too. If you formed an LLC in Delaware or Wyoming and you’re doing business in Texas, you need to register as a foreign entity with the Secretary of State and you’ll owe franchise tax on revenue attributable to Texas. We see this with consulting firms that thought a Wyoming LLC would let them skip Texas filings. It doesn’t. The Comptroller looks at where the business activity happens, not where the entity was formed.
The $2.65 million no-tax-due threshold
The headline number for most small Texas businesses is the no-tax-due threshold of $2,650,000 in total revenue. If your entity’s total revenue for the report year is at or below that figure, you owe no franchise tax. That’s why so many Austin LLCs, Houston consultancies, and Dallas service businesses end up with a $0 liability even though they technically file every year. The threshold is generous compared to what most states charge for a similar privilege tax, which is part of why Texas markets itself as business-friendly.
Total revenue for franchise tax purposes is not the same as gross receipts or federal gross income. The Comptroller defines it specifically in Tax Code §171.1011, and the starting point is the entity’s federal gross receipts or sales with several adjustments. For a single-member LLC reporting on a Schedule C, you start with Schedule C gross receipts. For an S-corp, you start with the gross receipts line on Form 1120-S. For a partnership, it’s the gross receipts on Form 1065. From there you add back items like interest income, dividends, and certain other receipts, then subtract specific exclusions like flow-through funds collected on behalf of someone else.
The threshold gets pro-rated for short report years. If your entity existed for only six months of the year because you formed it mid-year, you don’t get to use the full $2.65M against half a year of revenue. The Comptroller pro-rates the threshold based on the number of days the entity was in existence during the report period. That trips up new LLCs in their first year, especially ones that ramp revenue quickly. A Houston e-commerce LLC formed in July 2024 that hit $1.5M of revenue by year-end thought it was safe under the threshold. It wasn’t, because the pro-rated threshold for a half-year was about $1.24M.
Long Form 05-158 vs EZ Computation 05-169
Once an entity is over the no-tax-due threshold, the franchise tax computation kicks in. There are two paths: the Long Form (Forms 05-158-A and 05-158-B together) or the EZ Computation (Form 05-169). The Long Form is the default and computes the tax based on taxable margin with deductions. The EZ Computation is an optional simplified method for entities with total revenue under $20 million that applies a flat rate to total revenue with no margin calculation at all. Which one you choose can change the bill substantially, and the choice isn’t obvious from the forms.
The Long Form rate is 0.75% of taxable margin for most businesses, and 0.375% for entities primarily engaged in retail or wholesale trade. Taxable margin is the lesser of four amounts: 70% of total revenue, total revenue minus cost of goods sold, total revenue minus compensation, or total revenue minus $1 million. You apportion that margin to Texas using a single-factor gross receipts formula, then apply the rate. The strategy is to find the deduction method that produces the lowest margin. A wholesale distributor with $5M of revenue and $3M of COGS would compute margin under the COGS deduction at $2M, which beats the 70% method that produces $3.5M.
The EZ Computation applies a flat 0.331% to apportioned total revenue with no deductions for COGS or compensation. It’s faster and simpler. But faster doesn’t mean cheaper. A consulting firm with $4M of revenue, $3M of compensation, and no COGS would owe roughly $13,200 under the Long Form using the compensation deduction (0.75% × ($4M – $3M)). That same firm using EZ would owe about $13,240 (0.331% × $4M). The numbers are close in that example, but flip the comp number to $1M and the Long Form bill is $22,500 while EZ stays at $13,240. EZ wins when your deductions are small relative to revenue. Long Form wins when you have heavy COGS or comp.
Public Information Report and Ownership Information Report
Filing the franchise tax report by itself doesn’t satisfy the full Texas annual filing obligation. Most entities also have to file a Public Information Report (Form 05-102) for corporations and LLCs, or an Ownership Information Report (Form 05-167) for partnerships and other entities. These are the disclosure documents that the Comptroller passes along to the Secretary of State to keep the public record current on officers, directors, members, and registered agents. They’re due at the same time as the franchise tax report.
The Public Information Report asks for the names and addresses of all directors, officers, and managing members or managers, plus the registered agent and registered office. It also asks whether any of those individuals are also officers or directors of another entity owning at least 10% of the reporting entity. People treat this as a throwaway form and put it off, but it has real consequences. If you skip the PIR, the Comptroller can mark your entity as not in good standing, which means you can’t sue in Texas courts, you can’t get a Certificate of Status, and you may have trouble closing on a property or a loan.
We’ve cleaned up dozens of these situations for clients who let the PIR slide for years while they kept paying the franchise tax. The entity stays alive but loses standing, and the fix requires filing all missed reports plus a fee to reinstate. If you formed an LLC just to hold a single rental property in Austin and you’ve been ignoring the PIR because you thought the franchise tax filing covered it, you probably have a cleanup project waiting for you.
Due dates, extensions, and what happens when you miss them
Texas franchise tax reports are due May 15 for calendar year entities. That date applies to the report and any tax owed. If May 15 falls on a weekend or holiday, the deadline shifts to the next business day. Fiscal year entities have their own due date based on their accounting period, but most of our Austin and Houston clients run on a calendar year so May 15 is the date that matters. The federal tax deadline of April 15 has no bearing on the Texas filing.
Texas grants an automatic extension to November 15 if you file Form 05-164 and pay the required amount by May 15. The required amount depends on which extension path you choose. To get the full extension to November 15, you generally need to pay either 100% of the prior year’s tax liability or 90% of the current year’s estimated liability. Mandatory electronic filers (entities that paid $10,000 or more in franchise tax the previous year) have additional rules and must e-file. If you underpay the extension, you lose the extension and the tax becomes due as of May 15 with penalties accruing from that date.
Late filing penalties start at $50 per missed report, and that’s before any tax-based penalties. If you owe tax and miss the deadline, you get hit with a 5% penalty on the unpaid tax, climbing to 10% if it’s more than 30 days late, plus interest at the Comptroller’s published rate. Worse, sustained nonfiling triggers forfeiture of the entity’s right to do business in Texas, after which the Secretary of State can terminate the entity. Reinstating a terminated entity is a paperwork ordeal, and any contracts the entity signs while in forfeiture status are technically voidable by the other party. That last point matters more than people realize because it can blow up a real estate deal or a financing arrangement that’s already in progress.
How franchise tax interacts with your federal return
Franchise tax paid to Texas is deductible on the federal return as a state and local tax. For C-corps and partnerships it goes on the entity’s federal return as a tax expense. For S-corps and other passthrough entities, it goes on the entity return and reduces the income that flows out to owners on K-1s. The deduction doesn’t change the federal tax liability dramatically because most small business owners aren’t paying material franchise tax in the first place, but it’s a real deduction and you don’t want to miss it.
What does change the federal calculus is the SALT cap workaround for passthrough entities. Texas hasn’t created a passthrough entity tax election the way New York, California, and many other states have, because Texas doesn’t have a state income tax to work around in the first place. So Texas business owners don’t get a separate PTET deduction to consider. The franchise tax just flows through as a normal business expense, and the federal SALT cap on individual returns, $40,400 for 2026, is unaffected by franchise tax because franchise tax is paid by the entity, not the owner personally.
If you own businesses in multiple states, the franchise tax bookkeeping gets messier. Each state’s tax has to be tracked separately, deducted at the right level, and reconciled against the K-1s the owners receive. We’ve seen partnership returns where the preparer lumped Texas franchise tax in with general state taxes and the partners’ personal returns ended up with the deduction in the wrong place. That kind of error is easy to fix if you catch it, expensive to fix if you don’t and the IRS or a state revenue department asks questions years later.
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Frequently Asked Questions
Does my Texas LLC actually owe franchise tax if revenue is under $2.65M?
The short answer is no, your Texas LLC almost certainly owes zero franchise tax if total revenue is at or below $2,650,000 for the report year. But the longer answer is that you still have to file a franchise tax report and a Public Information Report every year, even at $0 in tax. That’s the part that confuses people. Texas separates the filing obligation from the tax obligation, and skipping the filing because you owe nothing is a fast way to lose the entity’s good standing with the state.
The $2.65M figure is the no-tax-due threshold for reports due in 2024 and forward. The Comptroller adjusts it periodically, usually every two years, based on inflation indexing under Tax Code §171.002(d). Before 2024 it was $1.23M. So if you formed your LLC pre-2024 and remembered the old number, you may be thinking the threshold is more aggressive than it is. The current number is roughly double what it used to be, which is a real break for small businesses.
Pro-ration is the catch most new LLCs miss. If you formed your LLC mid-year, the threshold pro-rates based on how many days the entity existed during the report period. We worked with an Austin SaaS founder who formed his LLC on August 1, 2024 and hit $1.8M in revenue from August to December. He assumed he was safely under $2.65M and would owe nothing. The pro-rated threshold for his five-month entity was about $1.03M. He was over by $770,000 of revenue subject to the margin computation, and the resulting franchise tax bill was about $4,200 after applying the compensation deduction.
Total revenue for franchise tax is defined by statute, not by what’s on your QuickBooks income statement. It starts from federal gross receipts or sales and gets adjusted under Tax Code §171.1011. Common add-backs include interest income, dividends received, and certain other receipts that don’t show up in your federal gross revenue line. Common exclusions include flow-through funds (money you collected on behalf of someone else, like sales tax or client trust funds) and certain bad debts written off in the report period.
Common mistakes we see: using accrual revenue when you report on cash basis federally, forgetting to exclude flow-through funds, including pass-through rental income that should have been excluded under the passive entity test, and counting gross 1099 income from platforms like Stripe or Square without netting out the platform fees that they sometimes report on a gross basis. Each of those errors can push a business over the threshold or change the margin calculation in a way that creates a tax bill where there shouldn’t be one.
Documentation matters when you’re sitting right at the threshold. The Comptroller can and does audit franchise tax reports, especially for entities that report total revenue right around the threshold or that claim large deductions for COGS or compensation. You want the same books and records you’d produce for a federal audit: bank statements tied to the books, invoices, contracts that show what services you provided, and reconciliations of federal gross receipts to Texas total revenue. The audit window for franchise tax is four years from the due date of the report, longer if there’s fraud or substantial underreporting.
Audit considerations get heavier when an entity has been claiming the no-tax-due status year after year and then a single year shoots over the threshold. The Comptroller may look at the prior years to see whether the entity should have been over the threshold in those years too. We’ve seen cleanup engagements where a client filed three years of no-tax-due reports and one year of a real tax bill, and the Comptroller went back and audited the no-tax-due years. The penalties on prior-year underreporting can rival the original tax.
Where we add value at The Reed Corporation is keeping the Texas franchise tax filing tied to the federal return so the numbers reconcile and the documentation is in place. Most Austin and Houston business owners don’t think about franchise tax until April, panic in May, and either DIY a flawed filing through Webfile or hire someone last-minute who doesn’t know the entity. We handle franchise tax as part of the annual business return engagement so the federal numbers and the Texas numbers come from the same set of books. If you’re under the threshold, we file the simplified report; if you’re over, we run the margin calc both ways and choose the lower bill.
If you’ve been filing your own franchise tax reports for a few years and aren’t sure whether the numbers were right, we can do a lookback review. Pulling the prior reports, reconciling them to your federal returns, and confirming the entity is in good standing usually takes a couple of hours. The fix for any errors is almost always cheaper to handle proactively than to wait for the Comptroller to notice.
When should I use the EZ computation method (Form 05-169) versus the long form (05-158)?
The EZ Computation on Form 05-169 is available to any taxable entity with annualized total revenue under $20 million. It applies a flat 0.331% rate to apportioned total revenue with no deductions. The Long Form on Forms 05-158-A and 05-158-B uses the margin calculation with COGS, compensation, or the 30% method as deductions, applied at 0.75% (or 0.375% for retail/wholesale). The right answer depends entirely on whether your deductible costs are large enough to bring the margin down below the EZ tax base.
Here’s the quick test. If you take your total revenue and multiply by 0.331%, that’s your EZ bill. If you take your taxable margin under the best deduction method and multiply by 0.75%, that’s your Long Form bill. Whichever is smaller is your answer. The crossover point for a non-retail business is roughly when your largest deduction is about 56% of revenue. Above that ratio, the Long Form wins. Below it, EZ wins. For retail/wholesale businesses where the Long Form rate is 0.375%, the crossover is around 12%.
Most professional services firms have heavy compensation expense and benefit from the Long Form. A 12-person Austin marketing agency with $5M in revenue and $3.5M in payroll would compute Long Form margin at $1.5M (revenue minus compensation), times 0.75%, equals $11,250. EZ on the same firm would be $5M times 0.331%, equals $16,550. The Long Form saves $5,300 a year. Worth the extra forms.
Retailers and wholesalers usually have heavy COGS and also benefit from the Long Form, especially because their Long Form rate is half the standard rate. A Houston wholesale distributor with $8M in revenue and $5.5M in COGS computes Long Form margin at $2.5M, times 0.375%, equals $9,375. EZ on the same business would be $8M times 0.331%, equals $26,480. The Long Form is a third of the EZ bill in that scenario. The 0.375% rate is a real break for goods-based businesses.
EZ usually wins for asset-light service businesses where the owner is the only person on payroll and the W-2 is small. A solo consultant LLC with $1.5M in revenue, $200K in W-2 comp to the owner, and minimal COGS would compute Long Form margin at $1.05M (the 70% method beats both COGS-light and comp-light calcs), times 0.75%, equals $7,875. EZ on the same business would be $1.5M times 0.331%, equals $4,965. EZ saves $2,910. The 30% standard deduction baked into the margin formula isn’t enough to beat the lower EZ rate when the other deductions are small.
Common mistakes: people pick EZ because the form is shorter, without running the Long Form numbers to compare. We’ve reviewed years of returns for clients who filed EZ every year because their accountant said it was simpler, and we recovered four-digit refunds on amended returns by switching to the Long Form. The Comptroller doesn’t tell you which one is cheaper; they just process whichever you file.
Documentation differs between the two methods. The EZ Computation needs essentially nothing beyond the revenue number. The Long Form needs supporting schedules: a COGS computation, a compensation schedule with wages and benefits broken out, and the apportionment factor. The cost-of-goods-sold definition in Tax Code §171.1012 is specific and doesn’t always match federal COGS. The compensation deduction under §171.1013 has a cap of $400,000 per employee for the 2024 report year. Anything above that cap for a high-paid owner or executive doesn’t deduct on the franchise tax side, even though it deducts federally.
Audit risk is generally higher on Long Form returns because there’s more to look at. The COGS deduction is the most-audited line. The Comptroller will ask for inventory rollforwards, vendor invoices, and reconciliations to federal COGS, with the understanding that Texas COGS doesn’t include everything federal COGS includes. Compensation deductions get audited for the per-employee cap and for whether the deduction was properly limited to W-2 wages and certain benefits.
Where we add value at The Reed Corporation is running the dual computation every year so the entity files under the cheaper method. For most clients with $3M to $20M of revenue, the math takes ten minutes and the savings are real. We also keep the documentation for the Long Form deductions clean so that if the Comptroller asks, the response is a same-day email instead of a panic.
If you’re DIY-ing franchise tax through Webfile and you’ve been picking EZ because the prompt is friendlier, run the Long Form numbers on paper before you file. The difference can easily be $5,000 to $20,000 a year for a mid-sized business. That math compounds over a decade.
What happens if I miss the Texas franchise tax deadline?
Missing the May 15 franchise tax deadline triggers a sequence of penalties and consequences that escalates fast. The first hit is a $50 late-filing penalty per missed report, regardless of whether you owe tax. If you owe tax, you get an additional 5% penalty on the unpaid balance for being late, climbing to 10% if you’re more than 30 days past the deadline. Interest accrues from the due date at the Comptroller’s published rate, which has been hovering around 8% to 10% annually in recent years.
The bigger consequence is loss of good standing. After a sustained nonfiling period (generally about 45 days past the deadline), the Comptroller marks the entity as not in good standing. That status shows up on Certificate of Status searches, which lenders, title companies, and counterparties pull before closings. A real estate deal can stall because the buyer’s LLC isn’t in good standing in Texas. A bank can pause a loan funding because the borrower’s LLC has a Certificate of Standing problem. These delays cost real money even though the underlying franchise tax bill might be zero.
If the nonfiling continues, the Secretary of State can forfeit the entity’s charter, which is a more serious status than just losing good standing. Forfeiture means the entity has lost its right to transact business in Texas. Contracts the entity signs during forfeiture are voidable by the other party. Officers and directors can become personally liable for entity debts incurred during forfeiture under Texas Business Organizations Code §171.252. Reinstatement is possible but requires filing all missed reports, paying all back tax, penalty, and interest, plus a reinstatement fee.
An Austin client came to us in 2024 with a Texas LLC that had been ignored for four years. The owner thought because he was below the no-tax-due threshold, the filings didn’t matter. The entity was forfeited. He tried to refinance a rental property held in the LLC, the title company flagged the forfeiture status, and the deal fell apart with two weeks to closing. We filed four years of back reports, paid about $250 in penalties and reinstatement fees, and got the entity back to good standing in three weeks. He lost his refi rate lock and ended up paying about 0.5 points more on the new loan, which on a $600,000 mortgage works out to about $3,000 over the rate lock period plus higher monthly payments.
Common mistakes that lead to missed deadlines: assuming the federal April 15 deadline is the same as Texas, assuming that no-tax-due means no-filing, switching mailing addresses without updating the Comptroller, and treating the automatic November 15 extension as a free pass without actually filing Form 05-164 by May 15. The extension isn’t automatic in the sense that you do nothing; it’s automatic in the sense that if you file the extension request and pay the required percentage, you get the extra time.
If you’re under the no-tax-due threshold but you missed the filing, the fix is usually quick and cheap. File the missing report through Webfile, pay the $50 late penalty, and the entity is back in good standing. The Comptroller is generally reasonable about waiving small late penalties for first-time offenders if you ask in writing. Penalty waiver requests should go through the Comptroller’s online tax help portal with a brief explanation and documentation showing the entity was below the threshold.
If you actually owed tax and missed the deadline, the math gets uglier. Say you owed $15,000 of franchise tax for the year and you didn’t file until July. You’re now looking at $750 in late-filing penalty (5%) climbing to $1,500 (10%) the moment you cross 30 days past May 15, plus accrued interest, plus the $50 late-filing penalty. The penalty alone is $1,550 on a $15,000 bill, with interest pushing the total to roughly $17,000 by the time you settle in late summer. Filing on time and paying late is cheaper than filing late and paying late, so if you can’t pay, file anyway and set up a payment plan.
Documentation for a late-filing situation: keep the timestamped Webfile confirmation, any payment confirmations, and any correspondence with the Comptroller. If you’re trying to reinstate a forfeited entity, you’ll need all missed reports, prior PIRs or OIRs, and proof of payment for back tax and penalties. The Secretary of State’s Certificate of Reinstatement is the final document that confirms the entity is back in good standing, and you’ll want a clean copy for your records and for any future closings.
Audit considerations rise after a nonfiling situation gets cleaned up. The Comptroller pays closer attention to entities that have a history of missed deadlines, and they may pull additional report years for review even after you’ve caught up. We advise clients coming out of forfeiture to keep documentation extra clean for the next three years to avoid triggering a deeper audit.
Where we add value at The Reed Corporation is calendar management and prevention. Every business client on our annual engagement gets the May 15 deadline tracked centrally, with extension paperwork ready by April. We don’t let franchise tax reports slip because the consequences of a missed deadline are out of proportion to the actual tax bill for most small businesses. If you’ve already missed a deadline and you’re worried about good standing, we can pull the Comptroller record, file the back reports, and request penalty abatement in a single engagement.
How does the Texas franchise tax interact with my federal income tax return?
Franchise tax paid to Texas is a deductible state tax on the federal return, but where it gets deducted depends on the entity type. For a Texas LLC taxed as a partnership or S-corp, the franchise tax is deducted at the entity level on Form 1065 or Form 1120-S, reducing the ordinary business income that flows out to the partners or shareholders on K-1s. For a C-corp, it’s deducted on Form 1120 as a state tax. For a single-member LLC reporting on Schedule C, it’s deducted on Schedule C as a tax expense.
The numbers on the federal return and the Texas franchise tax report don’t automatically match, and that’s where most reconciliation problems start. Texas total revenue is defined under Tax Code §171.1011, which adjusts federal gross receipts with add-backs (interest, dividends, etc.) and exclusions (flow-through funds, certain bad debts). Your federal Schedule C gross receipts are not the same number as your Texas total revenue. The federal COGS on Form 1125-A is not the same as Texas COGS under §171.1012. Federal compensation deduction follows IRC §162. Texas compensation deduction is capped per employee under §171.1013.
The SALT cap doesn’t directly affect franchise tax planning because franchise tax is paid by the entity, not the individual. The SALT cap on Schedule A, $40,400 per return for 2026 and $20,200 if married filing separately, only applies to taxes the individual pays personally. Business-level franchise tax bypasses that cap entirely because it’s deducted on the business return before income flows out. That’s a structural advantage of being in Texas: even without a state income tax workaround, entity-level franchise tax is fully deductible federally.
What Texas doesn’t have is a passthrough entity tax election. States like New York, California, New Jersey, and many others created PTET elections so that passthrough entities could pay a state income tax at the entity level, deduct it on the entity return, and bypass the SALT cap for individual owners. Texas didn’t create a PTET because Texas doesn’t have a state income tax. So Texas owners don’t get a separate PTET deduction on top of the franchise tax. The franchise tax is what it is.
Multi-state owners have the messiest reconciliation problem. If you own an Austin LLC and a California LLC, your federal return aggregates everything but your state filings split out California source income and Texas total revenue separately. The franchise tax paid in Texas reduces federal income on the entity return, which reduces the income flowing out to the owner, which interacts with the California passthrough tax election or the California franchise tax (a different beast). Multi-state K-1 work is one of the most-error-prone parts of small business tax prep.
Common mistakes: deducting franchise tax on Schedule A of the individual return (it’s an entity-level expense, not a personal one), forgetting to deduct it altogether (we see this on DIY returns where the owner just paid the Comptroller and never told the federal preparer), and including franchise tax in federal estimated payments calculations as if it were a federal credit (it isn’t). Each of those mistakes is small in dollar terms but reflects a broader misunderstanding of how state and federal taxes interact.
Real-world example: an Austin S-corp paid $18,500 in franchise tax for 2024. The owner’s accountant deducted it correctly on Form 1120-S, reducing ordinary business income by $18,500, which reduced the owner’s K-1 income by the same amount. At the owner’s 37% marginal federal rate, the franchise tax deduction saved about $6,845 in federal tax. The net cost of the franchise tax to the owner was about $11,655 after the federal deduction. That’s worth knowing when you’re modeling whether a Texas entity is worth the franchise tax cost.
Documentation: keep the franchise tax payment confirmation, the franchise tax report (Forms 05-158 or 05-169), and the reconciliation of federal gross receipts to Texas total revenue. The reconciliation isn’t required for filing but it’s the document you want if either the IRS or the Comptroller asks questions later. We keep a worksheet in our working paper file for every business return that ties out total revenue on the Texas report to gross receipts on the federal return with a list of adjustments.
Audit considerations: federal audits don’t generally trigger Texas audits and vice versa, but a major adjustment on one side can prompt scrutiny on the other. If the IRS reclassifies receipts as gross income that you’d excluded as flow-through funds on the Texas return, the Comptroller may ask why. The state and federal taxing authorities don’t share data in real-time, but they do share information through formal agreements, and a federal audit result can find its way into a state audit file.
Where we add value at The Reed Corporation is preparing federal and Texas franchise tax returns from the same set of books with the reconciliation built in. That’s a substantial efficiency gain over having one preparer do the federal return and a different preparer (or worse, a software wizard) do the Texas report. The numbers tie out the first time, the deductions land in the right places, and the documentation is in one file.
What’s the Public Information Report and is it the same as the franchise tax report?
The Public Information Report (Form 05-102) is a separate filing from the franchise tax report, but it’s due at the same time and most entities file them together through the Comptroller’s Webfile system. The PIR is a disclosure form, not a tax form. It lists the entity’s officers, directors, managing members or managers, registered agent, and registered office. The Comptroller forwards it to the Secretary of State to keep the public record current. Partnerships and certain other entities file an Ownership Information Report (Form 05-167) instead, which serves a similar disclosure purpose but asks for different information.
The PIR is required regardless of whether the entity owes franchise tax. Even a no-tax-due LLC has to file the PIR every year. That catches a lot of single-member LLCs off guard because they assume that if there’s no tax to pay, there’s no paperwork. There is. And missing the PIR has the same good-standing consequences as missing the franchise tax report itself, even though the PIR is just a disclosure document.
Information required on the PIR: the entity’s name, file number with the Secretary of State, principal office address, mailing address, registered agent name and address, and the names and addresses of all officers, directors, members, or managers in officer-equivalent roles. There’s a separate section asking whether any of those individuals are also officers or directors of another entity that owns at least 10% of the reporting entity. That section is the one that gets ignored most often, especially in multi-entity ownership structures where the answer should be yes but the preparer doesn’t bother checking.
Real-world example: an Austin client owns three LLCs through a holding company structure. Each operating LLC is owned by the holding LLC. The PIR for each operating LLC should disclose that the holding LLC owns 100% of it, and the officers of the holding LLC should be cross-referenced as officers of related entities. When we took over the engagement, we found that two of the three operating LLCs had been filing PIRs with that section left blank for the prior six years. The fix was filing amended PIRs going back two years and updating the current year filings going forward. Not the end of the world, but a sign that nobody had been paying attention.
Common mistakes: leaving sections blank, using the registered agent’s address as the principal office (those are usually different), filing the PIR without updating it when the entity changes officers or directors, and skipping the PIR entirely because the entity owed no franchise tax. The Comptroller does cross-check PIR filings against Secretary of State filings for officer and director changes, and discrepancies can trigger correspondence.
Filing logistics: Webfile is the primary path for PIR filing. You log in with the entity’s Webfile number (the 11-digit number on the Comptroller’s notices), pull up the franchise tax return, and the PIR is part of the same online workflow. You can also paper-file Form 05-102, but the Comptroller pushes electronic filing aggressively and paper takes longer to process. The PIR can also be filed standalone if the franchise tax report has already been filed but the PIR was missed.
Documentation: keep the Webfile confirmation, the PIR PDF that the system generates, and a working copy of the officer and director list with addresses. Update the working copy any time someone joins or leaves the entity so you’re not scrambling for current information at filing time. We maintain a one-page roster for each business client showing current officers, directors, managing members, the registered agent, and any 10%+ owners. That document becomes the source for the annual PIR.
Audit considerations: the PIR itself doesn’t get audited the way the franchise tax report does, but discrepancies between the PIR and other state records can prompt correspondence from either the Comptroller or the Secretary of State. The Texas Comptroller and the Secretary of State don’t always agree on what the current officer list is, especially when an entity files an officer change with one office and not the other. Keep both records aligned.
Penalties for PIR-only nonfiling are technically the same $50 late-filing penalty as the franchise tax report. But the more serious consequence is loss of good standing, which we’ve covered. A no-tax-due LLC that files its franchise tax report but skips the PIR can still lose good standing, and the title company picking up the file for a closing won’t differentiate between which filing got missed. They just see the bad-standing flag and pause the deal.
Where we add value at The Reed Corporation is treating the PIR and the franchise tax report as a single annual deliverable rather than two separate items that get filed separately and forgotten. Every business client engagement includes both filings as part of the same package. We pull the current officer list from our roster, reconcile it against any Secretary of State filings made during the year, and submit both reports together by May 15. The entity stays in good standing, the federal return references the right Texas numbers, and nothing falls through the cracks. If you’ve been filing the franchise tax piece without the PIR, or if you’re not sure whether your last PIR was correct, we can review the current Comptroller record and clean up anything that’s out of date.