What Houston Small Business Owners Actually Owe in Texas Franchise Tax Before Year-End
Harris County is home to the largest concentration of LLCs in Texas. The state has approximately 1.1 million active LLCs, and a significant share cluster in the Houston metro: energy services contr…
Harris County is home to the largest concentration of LLCs in Texas. The state has approximately 1.1 million active LLCs, and a significant share cluster in the Houston metro: energy services contractors working the Permian Basin remotely, solo medical practices near the Texas Medical Center, consulting firms along the Galleria corridor, staffing companies in Greenway Plaza. The overwhelming majority are small — single-member LLCs, S-corps with two or three shareholders, PLLCs set up by attorneys and nurses and therapists who filed the paperwork themselves and probably haven’t thought about the Texas Comptroller since.
That’s the population this piece is written for. And the single most expensive mistake that population makes is assuming that because they owe no franchise tax, they don’t have to file.
Wrong. It triggers penalties. It can ultimately cost a Houston business owner the legal right to operate in Texas. And it’s based on a misreading baked into the generic CPA blog posts that dominate search results — posts written for a national audience that don’t reflect current Texas law, the threshold that changed after 2023 legislation, or the specific entity structures common in Houston’s economy. Those posts rank well. They’re also outdated in ways that matter.
Here’s what the 2026 rules actually say.
Your LLC Has to File Even If It Owes Zero Dollars
Your Houston LLC must file a Texas franchise tax return even if you made no profit, even if you owe no tax, and even if you’re treated as a disregarded entity for federal purposes.
This is where solo operators get tripped up. If you run a single-member LLC and file a federal Schedule C — the IRS treats your LLC as a pass-through, you report business income on your personal Form 1040 — you may assume that because the entity doesn’t exist for federal tax purposes, it also doesn’t exist for Texas purposes. It doesn’t work that way. Texas franchise tax law treats your LLC as a taxable entity regardless of how the federal government classifies it. The Comptroller has been explicit about this for years. It still catches Houston operators off guard every year. Same mistake.
The mechanism is the No Tax Due Report (Form 05-163). If your total revenue falls below the current no-tax-due threshold — $2.47 million for the 2026 report year, updated following 2023 legislation — you don’t write a check to Austin. But you file a return. That return tells the Comptroller your revenue falls below the threshold. Skipping it isn’t a technicality. It’s a compliance failure with real consequences.
Who Has to File and What Forms Are Involved
Texas franchise tax applies to all “taxable entities” with Texas nexus: LLCs (single-member and multi-member), S-corporations, limited liability partnerships, and PLLCs. Houston-area physicians, dentists, attorneys, and accountants near the Texas Medical Center, Greenway Plaza, and the Montrose corridor use PLLCs heavily. Series LLCs fall under the requirement too — each series is treated as a separate taxable entity. C-corps and professional corporations must also file.
Sole proprietorships and general partnerships composed entirely of natural persons are exempt. That’s another reason the federal disregarded entity confusion persists: sole proprietors genuinely don’t file, and single-member LLC owners who operate the same way assume the exemption applies to them. It doesn’t. The entity type is what matters, not how you function day-to-day.
Every franchise tax filer must also submit a Public Information Report (PIR) (Form 05-102) for LLCs and corporations, or an Ownership Information Report (OIR) (Form 05-167) for certain other entity types — same submission, same deadline. These reports document the entity’s officers, directors, and ownership. Nearly every online guide omits this, which is why it bites people. Missing the PIR is a separate compliance failure from the tax filing. The Comptroller assesses penalties for missing PIRs independently.
If you filed a No Tax Due Report last year but forgot to attach the PIR, you may have a gap in your compliance record without knowing it. You can check your entity’s current standing through the Comptroller’s Texas Taxpayer and Franchise Tax Online portal and through the Secretary of State’s SOSdirect system. Worth checking before you assume everything is clean.
The 2026 No-Tax-Due Threshold: What Changed
After House Bill 1500, passed by the 88th Texas Legislature in 2023, the no-tax-due threshold was raised significantly. For the 2026 report year — covering the 2025 federal accounting period — it stands at $2.47 million in annualized total revenue. Most of the generic CPA blog posts still ranking on this topic cite the old figures: $1.18 million, $1.23 million. Those numbers have been superseded. If you’ve Googled this recently and seen them, they’re outdated. Verify the current threshold directly at comptroller.texas.gov before you finalize any calculation; the Comptroller adjusts it periodically based on the Consumer Price Index.
“Total revenue” under Texas franchise tax law is not your Schedule C gross receipts. This distinction matters for Houston’s large population of energy services consultants, independent contractors, and professional service providers with out-of-state clients. Texas franchise tax uses its own statutory definition, drawing from the Texas Tax Code and the entity’s federal return but with specific modifications. For most entities, it starts with gross revenue from the relevant line on your federal return — then Texas applies sourcing adjustments to determine which revenue is actually “Texas-sourced,” based on where services are performed and where the customer receives the benefit.
Texas uses a “receipts-producing, end-product act” standard for service revenue sourcing. A consulting firm that invoices clients in Calgary or Chicago but performs work remotely needs to understand how Texas sourcing rules determine what goes into the total revenue figure. This calculation isn’t intuitive, and it’s one of the reasons a CPA review is warranted before a small business owner assumes their federal top-line number either pushes them over or keeps them under $2.47 million. The federal number and the Texas number are often not the same.
For 2026, filing obligations break down like this:
| Your Annualized Total Revenue (Texas Definition) | Filing Obligation |
|---|---|
| $0 — $2.47 million | No Tax Due Report required (Form 05-163) + PIR |
| $2.47 million — $20 million | EZ Computation (Form 05-169) or Standard Margin method available |
| Above $20 million | Standard Margin method required (Form 05-158-A/B) |
Entities under $2.47 million are not excused from filing. They file the No Tax Due Report. “No tax due” means no payment; it does not mean no paperwork. That’s the whole ballgame for most small Houston operators. For a broader look at the structural choices facing Houston entrepreneurs — including how entity type affects your tax obligations — our business & professional coverage addresses these questions across industries.
EZ Computation vs. Standard Margin: Which One Saves You Money
For entities between $2.47 million and $20 million in total revenue, you have a choice of calculation method. Run both numbers. I mean that literally — this isn’t a situation where you pick the simpler option and move on.
The EZ method applies a flat rate of 0.331% to your total revenue with no deductions. If your Texas total revenue is $4 million, your franchise tax under EZ Computation is $4,000,000 × 0.00331 = $13,240. Simple. The problem is you’re taxed on gross revenue, not margin.
The Standard Margin Method lets you reduce your taxable margin by the greatest of: Cost of Goods Sold (COGS), using a Texas-specific definition that’s broader in some respects than the federal version; Compensation (wages, salaries, and benefits paid to employees, subject to a per-employee cap — verify the current cap at the Comptroller site); 70% of total revenue; or a flat $1 million deduction. You pick whichever produces the lowest taxable margin. The resulting margin is then taxed at 0.75% for most entities, or 0.375% for entities primarily engaged in retail or wholesale trade.
Oilfield services LLCs and energy services contractors with significant equipment costs or labor payroll tend to benefit from Standard Margin — both COGS and compensation deductions typically run large relative to revenue. Same logic applies to restaurant groups where COGS represents a substantial share of revenue, medical supply businesses near the TMC, and Houston staffing firms where compensation paid to placed workers is most of the cost structure.
A concrete example: An oilfield services LLC in west Houston with $6 million in Texas total revenue and $2.8 million in direct labor costs faces an EZ Computation bill of $6,000,000 × 0.00331 = $19,860. Under Standard Margin with the compensation deduction: ($6,000,000 − $2,800,000) × 0.0075 = $24,000. EZ Computation wins that round.
Change the compensation to $3.5 million: ($6,000,000 − $3,500,000) × 0.0075 = $18,750. Now Standard Margin wins. Neither method automatically beats the other — the answer depends entirely on your cost structure, and there’s no shortcut around running both. A CPA or SBDC advisor can structure this calculation in under an hour for most small entities.
Q4 Is When This Gets Decided
The 2026 franchise tax report covers the 2025 federal accounting year. Every revenue recognition and expense decision your Houston business makes before December 31, 2025 affects what you report to the Comptroller in May 2026. October through December is the window when you can still act.
Pull your year-to-date revenue now and compare it against $2.47 million. If you’re tracking close — say, $2.1 million through September — the timing of a large fourth-quarter invoice could push you over. That doesn’t necessarily mean defer the billing; business needs come first. But it should be a known variable in your planning conversation with a CPA, not a surprise you find in March.
If your structure includes multiple entity layers — a parent LLC, operating subsidiaries, a series LLC — check whether combined reporting applies. Texas franchise tax requires affiliated entities to report as a combined group under certain conditions. Houston has a large concentration of real estate and energy holding companies with exactly these layered structures. If you’re unsure whether your setup triggers combined reporting, ask now, before the accounting year closes.
Similarly, tiered partnership exemptions apply to some Houston-area investment structures and real estate limited partnerships. If your entity sits inside a tiered structure, flag it for your CPA in Q4, not April.
The federal estimated tax parallel creates a natural opening. The Q4 federal estimated tax deadline is January 15. Houston owners pulling together annual revenue figures in November and December to calculate their 1040-ES payments are already looking at data that feeds franchise tax calculations. Add the franchise tax projection to that same exercise. If you’re calling your accountant in December about estimated payments, franchise tax is five more minutes of the same conversation. If you’ve already been thinking through what Houston freelancers get wrong about Q2 estimated federal taxes, the same habits that trip people up mid-year tend to compound by year-end.
Houston CPAs start booking solid for tax season in January. By March, the good ones have full calendars and are managing existing clients. Owners who come in during Q4 with organized records have planning options. Owners who show up in April are mostly just filing. There’s a real cost difference between those two outcomes.
If You Miss May 15: Penalties, the Extension, and the Waiver Most Owners Don’t Know About
The Texas franchise tax annual report and payment are due May 15 — May 15, 2026 for the 2026 report year.
A 5% penalty applies to tax owed if not paid by that date. An additional 5% (cumulative 10%) is assessed if the tax remains unpaid 30 days after the Comptroller issues the first penalty notice. Interest accrues on unpaid balances at a statutory rate set annually — verify the current figure at comptroller.texas.gov before any late-payment calculation.
For entities under the $2.47 million threshold that owe no tax, the penalty exposure is different but still real. Missing the filing deadline can result in penalties for failure to file, and the entity’s right to conduct business in Texas can ultimately be forfeited. Forfeiture isn’t immediate, but it creates title problems for real estate transactions, contract problems for government contractors, and liability exposure for owners who kept operating under a forfeited entity. Honestly, that’s the scarier outcome. Penalty notices are annoying. A forfeited entity can blow up a deal.
An automatic 90-day extension to August 15, 2026 is available if requested by May 15 through the Comptroller’s Webfile system. The extension covers the filing deadline, not the payment deadline. If you owe tax, it’s still due May 15. The extension gives you more time to file the forms; it does not pause the interest clock on an underpayment. This confusion generates a lot of unnecessary penalty notices every year.
Under Texas Tax Code §111.103, the Comptroller has authority to waive penalties for taxpayers with a clean prior compliance history. The waiver request goes through Form 89-224 (Request for Waiver of Penalty) or direct contact with the Comptroller’s tax assistance line at 1-800-252-1381. It’s not automatic, but the Comptroller’s office grants it for qualifying filers who ask. Most Houston small business owners who receive a penalty notice have no idea this option exists. If you’ve missed a filing due to a genuine misunderstanding, pay the tax promptly, file Form 89-224 with a clear explanation, and at minimum make them say no. Don’t just pay the penalty without trying.
Harris County has received Comptroller-issued disaster extensions following major weather events. Hurricane Harvey in 2017 delayed deadlines for affected businesses; Hurricane Beryl in July 2024 generated similar relief — and if you were in Houston for Beryl, you don’t need me to explain why. If a significant storm affects the Houston area before or during the May 2026 filing window, monitor the Comptroller’s disaster relief page at comptroller.texas.gov/disasters for any extended deadlines affecting Harris County. These extensions are announced reactively, usually fast, and communicated through the Comptroller’s email alert system. Worth subscribing if your business is franchise tax active.
Where to Get Free Help Filing in Houston
The University of Houston Small Business Development Center is at 2302 Fannin St., Suite 200 in Midtown. It offers free one-on-one business advising that covers tax compliance — not just startup planning. Advisors work with clients on franchise tax questions specifically. The center is funded through a partnership between the SBA and the University of Houston; there’s no cost to the business owner for consulting sessions. Appointments are required: call 713-752-8400 or schedule online.
The UH SBDC won’t prepare your return — it’s not a CPA firm. But the advising sessions are substantive enough that many Houston solopreneurs come in with their prior-year return and a list of questions and leave with a clear action plan. For an owner trying to understand whether they need to file, which form to use, or what the no-tax-due threshold means for their specific situation, a free SBDC session is a reasonable first step before paying for CPA time.
Satellite locations cover the rest of the metro. Lone Star College campuses serve north Harris County and the Kingwood/Humble area. San Jacinto College serves the Pasadena/Baytown/Ship Channel corridor — an area with significant industrial and energy services LLC activity. Houston Community College campuses serve central and southwest Harris County. Current locations and appointment availability are at sbdchouston.com; hours and advising formats vary by location, so call ahead.
The SBDC network usually runs Q1 workshops on Texas franchise tax basics in the weeks before the May 15 deadline. Call the UH Fannin location in January to ask whether a 2026 session is scheduled.
The Comptroller’s free Webfile system at comptroller.texas.gov/webfile handles straightforward No Tax Due Report filings including the PIR. The interface is functional — it’s a government portal, not a consumer app, but it moves you through the No Tax Due Report and PIR in sequence and submits both electronically. You’ll need your Texas taxpayer number, which appears on any prior Comptroller correspondence and can be looked up through the Comptroller’s taxpayer search tool.
If you’re evaluating whether to hire a CPA for franchise tax preparation, both the Houston CPA Society (houstoncpasociety.org) and the Texas Society of CPAs publish practitioner guidance that reflects current compliance issues. The TXCPA’s annual franchise tax update is worth reading before a paid consultation — it won’t replace professional advice, but it makes you a better-prepared client, and that matters when you’re paying by the hour.
The Short Version for Owners Who Skimmed Here First
If your Houston LLC had less than $200,000 in total revenue in 2025, you owe zero Texas franchise tax for the 2026 report year. You still must file a No Tax Due Report (Form 05-163) and a Public Information Report by May 15, 2026. Not filing because you owe nothing is the mistake. The obligation to file is separate from the obligation to pay, and missing it can result in penalties and, over time, forfeiture of your entity’s right to do business in Texas.
At $200,000 in annual revenue, you’re well under the $2.47 million threshold. The filing is a short form, completable free through Webfile. A UH SBDC advisor can walk you through it at no cost. But it has to be done by May 15.
What to Do Before December 31
Pull your year-to-date revenue and compare it to $2.47 million. Under it, your May filing is a short form. Approaching it or above it, run both the EZ Computation and Standard Margin calculations before the year closes — your cost structure determines which one wins, and you won’t know without doing the math.
If your entity has a multi-tier structure, a combined group question, or significant revenue from out-of-state clients that could affect Texas sourcing, that conversation needs to happen before December 31. After January 1, the 2025 accounting year is closed. You’re reporting, not planning. That shift costs money.
The Comptroller’s Webfile system, the UH SBDC at Fannin Street, and the first-time penalty waiver under §111.103 are real tools that most Houston owners never use. Start there.
All rates, thresholds, and form numbers cited in this article should be verified at comptroller.texas.gov before filing. Thresholds are subject to periodic adjustment by the Comptroller based on CPI indexing. This article is for informational purposes and does not constitute tax or legal advice.
