State Deep Dive

C Corp vs S Corp in Texas

Texas has no individual income tax. The Texas franchise (margin) tax applies at the entity level to both C corps and S corps at the same rate. For most small operators, the no-tax-due threshold of $2,470,000 in total revenue (2026, indexed) eliminates the franchise tax entirely. Above that, federal entity choice still matters but the Texas math is identical.

Updated May 2026. Not tax advice.

Texas franchise tax (2026)

No tax due below

$2.47M

In total revenue

Standard rate

0.75%

Of taxable margin

Retail/wholesale rate

0.375%

Of taxable margin

The no-tax-due threshold

Texas businesses with total revenue at or below $2,470,000 (the 2026 threshold; adjusted biennially) owe no franchise tax but must still file a No Tax Due Report (Form 05-163) annually. Failure to file may forfeit the entity's right to do business in Texas.

For a Texas S corp owner-operator clearing $400,000 net profit on $800,000 revenue, the franchise tax is zero. The only Texas obligations: Public Information Report, annual filing, registered agent. Combined typical cost under $200 per year.

Source: Texas Comptroller Franchise Tax

Above the threshold: the margin tax math

Texas computes taxable margin as the lesser of:

70 percent of total revenue
Total revenue less cost of goods sold (COGS)
Total revenue less compensation (capped at $400,000 per individual, 2026)
Total revenue less $1 million (the EZ deduction)

Pick whichever gives the lowest taxable margin. Then apply 0.75 percent (general) or 0.375 percent (retail/wholesale). The EZ deduction option ($1M off revenue) effectively makes the franchise tax 0 for businesses up to $3.47M in revenue who use the simpler computation.

A Texas restaurant grossing $4,000,000 with $1,200,000 of compensation might compute margin as ($4M - $1.2M = $2.8M) and pay $21,000 in franchise tax at 0.75 percent. A retail operation at the same revenue qualifying for the 0.375 percent rate would owe $10,500.

S vs C in Texas at the entity level

The Texas franchise tax applies equally to S corps and C corps. There is no S corp preferred rate, no minimum tax beyond filing requirements, no separate S election form. From a Texas state perspective, the entity choice is tax-neutral.

Federal entity choice still matters: an S corp owner pays personal federal income tax (no Texas individual income tax to add), while a C corp owner pays 21 percent federal corporate tax plus dividend tax on distributions. For most Texas owner-operators above the $80k profit threshold for S corp election, S corp wins on federal SE-tax savings with no Texas penalty.

The Texas advantage for QSBS founders

Texas conforms to federal income tax rules (insofar as Texas has no state income tax to conform to). A QSBS founder selling for $10M owes zero federal capital gains tax under IRC Section 1202 (if held 5 years) and zero Texas state tax. Compare to California, where the same $10M sale produces approximately $1.3M in state tax.

This drives the Austin/Texas relocation pattern for late-stage venture-backed founders preparing for liquidity events. The QSBS benefit is preserved fully only if the founder is a Texas resident at the time of sale. Establishing real residency requires more than registering a P.O. box; physical presence, voter registration, vehicle registration, and severing California ties typically matter.

Sources

Educational only. Texas margin tax mechanics are detailed; consult a Texas CPA for businesses above the threshold.

In California In Florida QSBS Section 1202 50-state table