Texas Franchise Tax Forms 05-158 and 05-164: A Guide for Startups

Texas Franchise Tax Overview for Startups

Despite having no state income tax, Texas imposes a franchise tax (also called the margin tax) on most entities doing business in the state. The tax applies to corporations, LLCs, partnerships, and other legal entities with annualized total revenue exceeding the no-tax-due threshold, which is $2,470,000 for reports due in 2026. The tax rate is 0.375% for qualifying wholesalers and retailers and 0.75% for all other entities, calculated on the taxable margin.

Taxable margin is the lesser of: total revenue minus cost of goods sold (COGS), total revenue minus compensation, total revenue times 70%, or total revenue minus $1 million. Most startups with significant payroll costs benefit from the total revenue minus compensation method. The filing deadline is May 15 each year, covering the prior calendar year's activity.

Even if your startup owes zero franchise tax because revenue falls below the $2,470,000 threshold, you are still required to file. Failure to file results in forfeiture of your right to do business in Texas, which can lead to personal liability for officers and directors.

Form 05-164: No Tax Due Report

Form 05-164 is the simplified report for entities that meet the no-tax-due threshold. You can file this form if your total revenue is at or below $2,470,000 for the 2026 reporting year. The form is straightforward, requiring basic entity information, your Texas taxpayer number (which is your 11-digit number assigned by the Comptroller), your SOS file number, and a certification that total revenue does not exceed the threshold.

Key details: the "total revenue" figure on Form 05-164 is not the same as gross revenue. Total revenue for franchise tax purposes starts with the amount reported on your federal return (line 1c of Form 1120 for corporations) and then applies specific additions and subtractions under Texas Tax Code Chapter 171, Subchapter F. Certain items like dividends from subsidiaries, gains from the sale of a subsidiary, and specific industry exclusions can reduce total revenue below what you might expect.

For Delaware C-Corps doing business in Texas, total revenue is the Texas-apportioned share based on your gross receipts factor. If only 30% of your revenue comes from Texas customers, only 30% of your total revenue is used for the no-tax-due threshold determination. This means many startups with nationwide revenue and a Texas presence will qualify for the no-tax-due filing even if their total company revenue exceeds $2,470,000.

Form 05-158: Extension Request and Initial Franchise Tax Report

Form 05-158-A is the Texas franchise tax extension request, due by May 15 if you need additional time to file your annual report. The extension gives you until November 15 to submit your final report, but you must pay at least 90% of the tax due with the extension request or pay 100% of the prior year's tax. If you underpay the extension estimate by more than 10% of the final liability, penalties and interest will apply.

The associated Form 05-158 is used for the actual franchise tax report when you owe tax (total revenue exceeds the no-tax-due threshold). This form requires you to calculate taxable margin using one of the four methods, apply the appropriate tax rate, and determine the final tax due after credits.

For startups that were recently formed or recently registered to do business in Texas, the initial franchise tax report covers the period from the entity's formation or registration date through the end of the following calendar year. This means your first report can cover up to 18 months of activity. The annualization calculation on the initial report often catches founders off guard. If you formed in July and earned $1.5 million by December, the annualized revenue would be $3 million, potentially pushing you above the no-tax-due threshold even though your actual revenue was below it.

Common Filing Mistakes and Penalties

The Texas Comptroller assesses a $50 penalty for late franchise tax reports, plus 5% of the tax due for the first 30 days after the deadline and an additional 5% for each subsequent 30-day period, up to a maximum of 25%. Interest accrues at the rate published quarterly by the Comptroller, which has been between 5% and 8% in recent years.

The most costly mistake is not filing at all. If you fail to file for two consecutive years, the Texas Secretary of State can forfeit your entity's right to transact business. Forfeiture means you cannot enforce contracts, defend lawsuits, or maintain your entity's good standing. Reinstating after forfeiture requires filing all delinquent reports, paying all back taxes with penalties and interest, and submitting a reinstatement application with a $75 fee.

Another frequent error is using the wrong SOS file number. Texas assigns separate numbers for different filings, and the franchise tax report requires the SOS file number from your original formation or registration document. Delaware C-Corps registered as foreign entities in Texas will have a Texas SOS file number that differs from their Delaware file number. Using the wrong number can result in rejected filings or misapplied payments.

How SpryTax Handles Texas Franchise Tax Filings

We prepare and file Texas franchise tax reports for all our clients with a Texas presence, including the analysis of which margin calculation method minimizes your tax. For the majority of our early-stage clients, total revenue falls below the $2,470,000 threshold, and we file the no-tax-due Form 05-164. For companies above the threshold, we calculate taxable margin under all four methods and select the one that produces the lowest liability.

Our process includes verifying your Texas taxpayer number and SOS file number with the Comptroller's office, calculating the revenue apportionment for multi-state companies, filing the Public Information Report (Form 05-102) that accompanies every franchise tax report, and monitoring any Comptroller correspondence. We also track the franchise tax deadline alongside your Delaware annual report (due March 1) and federal Form 1120 (due April 15) to ensure no filings are missed.