The tax applies to corporations, limited liability companies, partnerships (general, limited and limited liability), business trusts, professional associations, business associations, joint ventures and other legal entities organized in Texas or that do business in Texas. The tax is not imposed on: sole proprietorships, general partnerships directly owned by natural persons, and other specified entities such as certain financial services businesses, nonprofits, and others.

In addition, a corporation in Texas engaged solely in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax. There is no ceiling on this exemption, so it is a substantial incentive for solar manufacturers.

Based on calculation formulas and discounts, taxable entities with revenues of $434,782 or less will owe no tax. Taxable entities who calculate their tax due to be less than $1,000 will owe no tax. However, all taxable entities, including those who will owe no tax, must file a return.

The revised tax base is the taxable entity's "margin." Margin equals the lesser of a taxable entity's: total revenue minus cost of goods sold; total revenue minus compensation; or 70% of total revenue. Taxable margin will be the lowest of the three computations times the apportionment factor. An alternative to computing margin is available to taxable entities with revenue of $10 million or less (see Tax Rate section below).

• Total revenue is determined based on federal income tax reporting, with certain exclusions.
• Cost of goods sold, as defined by the new law, generally includes costs related to the acquisition and production of tangible personal property. There are other cost-of-goods-sold allowances for certain industries. Taxable entities that only sell services will generally not have a cost of goods sold deduction.
• Compensation and benefits include: W-2 wages and cash compensation paid to officers, directors, owners, partners and employees; benefits provided to all personnel, including workers' compensation, health care and retirement benefits. Compensation does not include 1099 labor, payroll taxes paid by the employer or payments to undocumented workers.

The tax base is apportioned to Texas using a single-factor gross receipts apportionment formula—Texas gross receipts divided by gross receipts everywhere. Gross receipts everywhere will equal total revenue for almost all taxpayers.

Taxable entities that are part of an affiliated group engaged in a unitary business must file a combined group report. Members of a combined group must use the same method to compute margin.

The tax rate is 1% of margin for most taxable entities. The tax rate is 0.5% for entities primarily engaged in retail and wholesale trades (as defined in Divisions F and G of the 1987 Standard Industrial Classification Manual) as well as those businesses under classified as eating and drinking establishments.

Discounts from tax liability are available to small business. The discount rates, based on total revenue, are :

• If total revenue is greater than $300,000 and less than $400,000, the discount is 80% of tax due
• If total revenue is greater than or equal to $400,000 and less than $500,000, the discount is 60% of tax due
• If total revenue is greater than or equal to $500,000 and less than $700,000, the discount is 40% of tax due
• If total revenue is greater than or equal to $700,000 and less than $900,000, the discount is 20% of tax due

Tax payers whose total revenue is $10 million or less may elect for the E-Z Computation which provides an alternative to computing margin. E-Z filers qualify for tax discounts, but no other credits. For these filers, the franchise tax due before discounts is computed by multiplying total revenue times the apportionment factor times 0.575% (.00575).