INSIGHT

Texas Franchise Tax 2026: What Austin Businesses Need to Know

Carolyn (Cotter) Gersovitz • May 14, 2026

Services: Tax

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If you run a business in Austin, Texas, the annual Texas franchise tax report is probably not the most exciting item on your calendar. But the 2026 report year brings a meaningful set of changes that could affect how you calculate your tax, what you owe, and what you still need to file, even when you owe nothing. Getting these details right matters, and getting them wrong can cost you more than just a penalty.

This article breaks down what changed for 2026 and what those changes mean for your business.

What is the Texas Franchise Tax?

The Texas franchise tax is a margin-based privilege tax imposed on nearly every taxable entity doing business in the state, including LLCs, S corporations, partnerships, and out-of-state entities with Texas nexus. While Texas famously has no personal state income tax, the franchise tax fills part of that gap at the business level.

Despite its broad reach, it’s one of the more commonly misunderstood state tax obligations for businesses. The franchise tax is not based on income or profit in the traditional sense. It’s based on taxable margin, which means the calculation starts from your gross revenue and applies a series of deductions, elections, and computation methods before arriving at what you owe.

That complexity is often where growing businesses encounter compliance and planning challenges.

Key 2026 Numbers You Should Know

The 2026 no-tax-due threshold has risen to $2.65 million in annualized total revenue. If your LLC or S-Corp’s revenue falls at or below this figure, you owe zero franchise tax, but you must still file a Public Information Report (PIR) or Ownership Information Report (OIR).

Here is a quick reference for the 2026 report year:

• No-tax-due threshold: $2,650,000 in annualized total revenue (up from $2,470,000)
• Standard franchise tax rate: 0.75% for most taxable entities
• Retail and wholesale rate: 0.375%
• EZ Computation rate: 0.331% (available to qualifying entities with $20 million or less in revenue)
• Annual report deadline: May 15, 2026
• Late filing penalty: $50 assessed on every report filed after the due date, with additional penalties of 5% (tax paid 1–30 days late) or 10% (beyond 30 days)

One point worth repeating: even if your revenue is well below the threshold and you owe zero tax, skipping the information report filing can trigger a $50 penalty and jeopardize your standing with the state. Filing and paying are two separate obligations under Texas law. Extended non-compliance may also impact an entity’s good standing status with the state, which can create complications during financing events, contract negotiations, or other business transactions.

Three Changes in 2026 That Deserve Your Attention

1. The Total Revenue Rule Has Been Updated

Effective March 1, 2026, the Texas Comptroller amended the franchise tax rule on total revenue to reflect recent legislation and updated federal tax conformity. For reports originally due on or after January 1, 2026, total revenue will generally be based on amounts reported on a taxpayer’s current federal income tax return, with the 2007 Internal Revenue Code applying only where specifically referenced.

This is a significant departure from how the Texas franchise tax has historically worked. For years, the state used the 2007 IRC as a fixed baseline. Now, the current federal return drives the calculation for most components of the franchise tax, which means federal-level changes can ripple directly into your Texas liability. The rule retains the 2007 IRC standard for excluding foreign dividends and royalties, meaning GILTI and FDII remain included in total revenue, and related federal deductions are not allowed.

If your business has international operations, complex ownership structures, or significant investment income, this change warrants a careful review before you file.

2. Bonus Depreciation Is Now Available for Texas Franchise Tax Purposes

Beginning with the 2026 franchise tax report, businesses may elect to deduct the full cost of qualifying fixed assets, such as machinery, equipment, and furnishings, acquired after January 19, 2025. Historically, Texas used the 2007 IRC for depreciation, which meant federal bonus depreciation was not available at the state level. That’s no longer the case.

For Austin businesses in capital-intensive industries like construction, manufacturing, technology, real estate development, and other high-growth sectors, this change creates a real opportunity to reduce taxable margin. But it requires coordination between your federal return and your Texas franchise tax report to capture the benefit correctly.

3. The R&D Tax Credit Has a New Structure

The new Subchapter T R&D credit is tied to amounts reported on the federal Form 6765 that pertain to Texas activities, which should simplify the computation. The revised credit generally equals 8.722 percent of qualifying research expenses over a baseline, increasing to 10.903 percent for entities contracting with one or more public or private higher education institutions.

Austin’s thriving tech, life sciences, and founder-led growth company ecosystem make this credit particularly relevant. If your business conducts qualified research activity in Texas, the updated credit structure is worth modeling against your filing position before the May 15 deadline.

5 Common Pain Points for Austin Businesses

Even with a solid understanding of the rules, franchise tax compliance creates friction for growing businesses. Here are the situations BPM professionals see most often among Austin-area clients:

1. Threshold proximity

If your revenue is close to the $2.65 million mark, even small fluctuations in revenue classification can push you from “no tax due” into a full margin computation. Before you file, pull your annualized total revenue figure from your books and compare it against $2.65 million. If you’re within $200,000 either direction, run the full margin computation anyway so you’re not caught off guard.

2. Margin calculation errors

You have four methods for calculating taxable margin:

• 70% of revenue
• Revenue minus COGS
• Revenue minus compensation
• Revenue minus the statutory deduction (currently $1M)

Running all four and choosing the lowest requires clean books and careful analysis. If you haven’t run all four methods recently, the compensation deduction in particular tends to be underutilized by service businesses with high payroll costs.

3. Nexus exposure for growing businesses

Effective January 7, 2026, the Comptroller adopted an amendment clarifying how foreign taxable entities determine economic nexus, specifically related to how gross receipts sourced to Texas are used to evaluate nexus.

As Austin continues to attract out-of-state businesses and remote workforces, nexus determinations are more important than ever. If you’ve hired remote workers in Austin from out of state, or if out-of-state customers are generating Texas-sourced gross receipts, that alone may be enough to create a filing obligation.

4. The federal-state disconnect

The new IRC conformity rule means your Texas franchise tax calculation now tracks more closely with your federal return, but not entirely. Knowing which components still use the 2007 IRC standard, and which ones use the current IRC, requires a level of detail that’s easy to miss in a high-volume filing environment.

5. Credit ordering and carry-forward management

The Texas Comptroller has provided guidance on the proper order for applying franchise tax credits and carryforwards, with priority generally given to credits expiring earlier.

If your business holds R&D credits, clean energy credits, or historic structure credits, applying them out of order can diminish their value.

The Bottom Line for Austin Businesses in 2026

The Texas franchise tax has never been simple, and the 2026 report year adds a new layer of complexity with updated IRC conformity rules, expanded depreciation options, and a restructured R&D credit. The good news is that many of these changes create planning opportunities for businesses that act before the May 15 deadline, not after.  

Whether you’re a fast-growing startup navigating franchise tax for the first time, an established business in the Austin area evaluating your margin calculation method, or a multistate company with evolving Texas nexus, now is the right time to revisit your filing position with an advisor who knows the details. 

BPM is an accounting, tax, advisory, and assurance firm with deep roots in state and local tax strategy. Our SALT services include a dedicated team of professionals that work with Texas businesses across industries, from high-growth Austin technology companies and life sciences firms to real estate developers, privately held businesses, and professional services organizations. 

Planning ahead is especially important this year, given the changes to IRC conformity, depreciation treatment, and credit calculations. 

Ready to get ahead of your Texas franchise tax obligations? Contact BPM to connect with our state and local tax professionals in the Austin area.