Pays Less Taxes Paying less tax with a Texas company, and the state reports to file

Steven Palmieri is a Tax CFO, also called the Entrepreneur's CFO, and the practice is based in Dallas.

We work by video and in the books you share with us, so your business can be in Dallas, in Fort Worth, or anywhere else in the state.

Everything on the rest of this site works for a Texas business: the S corp salary, retirement plans, the HSA, the QBI deduction, timing big purchases, the home office, the accountable plan, family wages and credits. With no state personal income tax, each federal dollar you save is the whole saving.

A Texas company also files with the state: the franchise tax report, the information report that goes with it, and sales tax if you sell taxable items. A good plan fits around those dates.

Picture two made-up shops with similar sales. Neither one is a client.

One owner filed an S election while the year was still open, set a fair salary, and sent the Texas report in May. The other owner heard about the S election after the year had closed, and didn't know the state still wanted a report in a year with no franchise tax due.

The first owner paid less federal tax and had no state late charge. The second owner can still elect S status for next year, and can catch up the missed state report now.

If you never formed a company and you file as a sole owner, the franchise report usually doesn't apply to you. A limited liability company is covered by it, even with one owner.

A company that elected S status is covered too. The S election is a federal choice only. The Texas report still applies after the IRS accepts it.

The Comptroller describes the franchise tax as a tax on the privilege of doing business in Texas as a company. It covers corporations, limited liability companies, partnerships other than general partnerships owned only by people, and the other entities listed in Publication 98-806.

A general partnership owned entirely by people, which the publication calls natural persons, is generally outside it. So is a sole proprietorship. A limited liability company owned by one person is inside it. The certificate you filed with the state tells us which one you have.

For report years 2026 and 2027, a company with annualized revenue of $2,650,000 or less owes no franchise tax and skips the computation report. It still files the information report, on Form 05-102 or Form 05-167, unless the Comptroller has already told it that it may skip.

For report years 2024 and 2025, the no-tax-due line was $2,470,000. Keep the two pairs of years apart when you look at a past report.

Retail and wholesale companies that owe the tax use a rate of 0.375% of margin. Every other company that owes it uses 0.75%. Those rates are the same for both pairs of years.

The compensation cap differs by year. For 2026 and 2027 it's $480,000 a person. The older cap, used for 2024 and 2025 reports, was $450,000 for each person.

A company with annualized total revenue of $20 million or less can use the shorter EZ computation. It taxes revenue at 0.331%, and it gives up the four margin measurements. On the call, we show you both before you choose.

On the long form, the margin is the smallest of four measurements: 70% of total revenue, total revenue minus the cost of goods sold the statute allows, total revenue minus compensation, or total revenue minus $1,000,000.

To find total revenue, start with the income on your federal return and take out the exclusions in the statute. A company that only sells services usually has no cost of goods sold to subtract, apart from a few industry exceptions in the statute.

When the long form applies, we figure all four with your books and use the one that gives the lowest margin.

Here's a made-up Texas services company for a 2026 report. It has $3,000,000 of total revenue, all from Texas customers, no cost of goods sold, and no exclusions. Because revenue is over $2,650,000, tax is due.

• EZ computation: $3,000,000 times 0.331% is $9,930.
• Long form, if it pays $1,200,000 of compensation: the four measurements are $2,100,000 (70% of revenue), $3,000,000 (no cost of goods sold), $1,800,000 (revenue minus compensation) and $2,000,000 (revenue minus $1,000,000). The smallest is $1,800,000. At 0.75%, the tax is $13,500.
• Long form, if it pays $2,000,000 of compensation, with no one over the $480,000 cap: revenue minus compensation is $1,000,000. At 0.75%, the tax is $7,500.

So the same revenue gives $9,930 on the EZ computation, and $13,500 or $7,500 on the long form, depending on payroll. The compensation subtraction counts no more than $480,000 for any one person. Your company's figures will differ, and we run all of them with your books before you file.

Corporations and limited liability companies file the public information report on Form 05-102. The filers are corporations, LLCs, limited partnerships, professional associations and financial institutions that were formed in Texas or have a Texas tie. The Comptroller calls that tie nexus, which means enough presence in the state for it to require the report.

Form 05-167, the ownership information report, is for the other taxable entities formed in Texas or tied to it. Its names stay confidential. The names on the public report are public.

Both reports are due the same day as the franchise report. That includes a year when the tax is zero.

A combined group still files member by member. Each member organized in Texas, and each member with a Texas tie, sends a report in its own name.

Skipping the report can cost the company the right to sue or defend itself in a Texas court. It can also make officers, directors, partners, members or owners personally liable for certain debts. Tax Code sections 171.251, 171.2515, 171.252 and 171.255 set out those rules.

Some companies don't file either information report. They need a paper that shows why: a passive entity, an exempt entity, a company owned by a new veteran during its first five years, or a company organized elsewhere with no Texas tie.

If you file the long form and subtract compensation, count W-2 wages and cash paid to the people who work for the company: officers, directors, owners, partners and employees. It also includes net distributive income paid to a person, inside the per-person cap for the report year, plus qualifying workers compensation, health care and retirement contributions.

Contract labor reported on a 1099 stays out of that subtraction, and so do the payroll taxes the employer pays.

Your S corp salary is set the same way as on our S corp salary page: by the work you do, what someone else would be paid to do it, and what the company can afford.

The franchise computation uses the wages you actually paid, up to the cap for that report year, and leaves the 1099 payments out.

If you need audited or reviewed financial statements, a CPA firm has to sign them. We figure the margin from your books and prepare the franchise report.

May 15 is the printed due date for the franchise report. If May 15 falls on a weekend or a holiday the Comptroller recognizes, it's due the next business day.

A late report picks up a $50 charge. Then the tax itself draws a 5% penalty when it's paid 1 to 30 days late, and 10% after that. From the 61st day past due, interest is added too.

The Comptroller resets that interest rate every year and posts it on its website.

To get more time, you pay by the original due date. The extension is earned by paying either all of last year's franchise tax or 90% of what this year's report will show.

A company filing its first annual report can't rely on the prior-year amount for the extension.

A company that isn't required to pay electronically asks for the extension on Webfile or Form 05-164. The extended due date is November 15.

Similar sales can also mean different sales tax. Texas sales tax starts with a state rate of 6.25%. Cities and other local authorities can add up to 2%, for a combined top rate of 8.25%.

Local rates differ by city, so look up yours on the Comptroller's sales tax rate locator for the month you're asking about.

A monthly sales tax filer's report is due on the 20th of the month after, which puts April's report on May 20. Quarterly filers file for the quarters that end in March, June, September and December, by the 20th of the month after. Yearly filers file for the prior year by January 20.

Your filing schedule is in the letter the Comptroller sent with your permit. We'll check it with you.

A late sales report picks up the same $50 charge, then the same 5% and 10% penalties. Interest again starts on the 61st day, at the rate on the Comptroller's page.

Pay sales tax on time and you keep 0.5% of the tax as a discount. Prepay, as the Comptroller defines it, and you keep another 1.25% on top. That's money back from tax you were going to pay anyway.

A Texas limited liability company is formed with the Secretary of State on Form 205, and the filing fee is $300. Form 2553 is the federal S election. The company on file with Texas stays the same corporation or LLC after the election.

The franchise report applies either way. The S election changes how the IRS taxes the profit. The state report, and a fair salary for the work, still apply.

The company needs a registered agent, and it can't be its own agent. The registered office has to be a street address where legal papers can be handed to a person, not only a mail drop.

For the S election, the IRS window closes 2 months and 15 days into the tax year you want covered, and it opens a full year earlier.

A made-up company that starts on January 7 with a calendar year has until March 21. An existing C corporation that wants S status for a calendar year has until March 15.

If the deadline has passed, late-election relief may be available under Revenue Procedure 2013-30. Write FILED PURSUANT TO REV. PROC. 2013-30 at the top of Form 2553 when you ask for that relief. We check the dates with you before you rely on it.

Set a fair salary before taking distributions. Here's how.

The employer identification number comes after the state formation. The IRS issues it for free.

If you need an audit, a review or a compilation, a CPA firm signs that work. On the free 30-minute call, we look at your setup, your salary, your retirement plan and what this year can still include, along with the state reports that belong in the same year.

Bring last year's federal return and the IRS letter that accepted your S election, if you have one. Bring how you pay yourself now, any retirement plan statements, and your profit and loss so far.

If the company is in Texas, also bring whatever you last sent the Comptroller, even if you think the tax was zero. The information report, or the letter that says you may skip it, shows where you stand.

You'll leave knowing which federal moves fit you and about what each one is worth, and whether a state report needs catching up.

If a state report was missed, we'll tell you which one and help you file it.

Your business can be anywhere in Texas. The call is a video call either way.

Does a Texas company owe a report when the franchise tax is zero? Yes. You can still owe the information report in a year when the franchise tax is zero.

Do I have to come to Dallas? No. Steven Palmieri works from Dallas, and the call is by video. Bring your federal return and the last report you sent the Comptroller.

Which pair of years am I in? For a 2026 or 2027 report, the no-tax line is $2,650,000 and the compensation cap is $480,000. For 2024 or 2025, the no-tax line was $2,470,000 and the cap was $450,000.

Can I deduct the Texas franchise tax on the federal return? Yes. A franchise tax the business pays is generally a deductible business tax on the federal return for the year it's paid.

Does Texas tax my S corp distributions? Texas has no state personal income tax, so there's no state income tax on your salary or your distributions. The company itself may still owe franchise tax.