Texas is the second largest economy in the United States after California, with a gross state product of $2.4 trillion in 2022. Much of that money is made in the oil and gas industry, but agriculture, steel, banking and tourism also contribute significantly. One reason for the size of the economy may be that 21st century Texas has a very conducive business environment.
Important points
- Texas does not have a business income tax, but certain businesses are subject to a franchise tax.
- Businesses with less than $2.47 million in revenue pay no tax.
- Companies with revenue of $20 million or less pay 0.331%.
- Large companies pay 0.375% or 0.75% depending on the type of business.
Texas Taxes: Overview
Compared to most states, Texas has very low business taxes and no personal income tax. This gives Texas two distinct competitive advantages over many other states. Businesses can keep more of the money they earn and hire top talent because there is no personal income tax.
This news is even better for small businesses. Already low business tax rates will be reduced or zeroed out for businesses whose revenue does not exceed a certain threshold. For small and medium-sized businesses just starting out, this eases the burden of those early, uncertain times.
Texas has no corporate income tax. Instead, it imposes a franchise tax on some businesses. The difference between corporate income tax and corporate franchise tax is that income tax applies to profits, whereas franchise tax does not. A franchise tax is essentially a fee that a company must pay for the privilege of doing business in a particular state or city.
It is worth emphasizing that this is not a tax on a company's net profits, but on its gross receipts. Texas is one of only four states that have implemented this type of system. The others are Nevada, Ohio, and Washington.
Texas corporate taxes by size and nature of business
Small businesses with annual revenue below a certain level pay no franchise tax at all. This is known as the no-tax liability standard. For tax years 2024 and 2025, that threshold is $2,470,000.
Businesses with annual revenues above the threshold and below $20 million pay 0.331% of the portion of their revenues attributable to Texas (known as an allocation). You can submit your file using the EZ Calculation Report form (this form is really easy – it's a one-pager). Note that the EZ calculation form disallows certain deductions and credits that may be available to businesses, specifically deductions for cost of goods sold (COGS), compensation, economic development, and one-time credits. please.
Companies that are unable to file an EZ calculation form are subject to different tax rates depending on the nature of their business. Wholesaler and retailer tax is 0.375%. The tax rate for businesses other than retail and wholesale trade is 0.75%. In these cases, the tax is applied to what the state calls the tax margin. This is defined as the lowest of 70% of gross revenue, 100% of revenue less COGS costs, 100% of revenue less total compensation, or total revenue less $1 million.
Texas corporate tax by business structure
Almost all businesses in the state are subject to franchise tax, regardless of how they are structured. The only exceptions are sole proprietorships and certain types of partnerships. Here's an overview:
Company C
Many small businesses are not corporations, but once they reach a certain level of growth, they may convert from an LLC or S corporation to a C corporation. Like most states, Texas imposes a standard business tax on businesses, in this case the franchise tax. Like all businesses, corporations are subject to the tax-free standard and his EZ calculation rules.
S Corporation
S corporation is a common name used for small and medium-sized businesses. Incorporating has many benefits, but unlike a C corporation, it is not subject to separate federal income tax or, in most states, separate state income tax. Instead, a company's income is passed to its shareholders, who are then taxed separately.
However, Texas still imposes a franchise tax on S corporations based on the corporation's annual revenue. Individual shareholders of a corporation do not have to pay Texas taxes on their portion of the corporation's income.
This benefit is particularly attractive to small S corporations whose annual revenues do not exceed the tax-free threshold. They essentially operate tax-free, as no taxes are levied on the business itself or the individuals receiving income from the business.
limited liability company
Limited liability company (LLC) is another common name for small businesses. In most states, an LLC is an entity that protects the business owner from certain legal liability while passing on its income to the business owner and paying personal income taxes.
Similar to S corporations, Texas bucks the national trend and imposes a franchise tax on LLCs with the same rules that apply to other industries. However, income passed to the owner as personal income is not subject to state income tax in Texas (because Texas does not have a personal income tax).
Partnership and sole proprietorship
Most Texas small businesses that are partnerships pay franchise taxes, while sole proprietorships do not. The litmus test in a partnership is whether the business is directly owned by individuals and whether the business income is distributed directly to those individuals. In these situations, Texas treats the partnership like a sole proprietorship and does not impose a franchise tax.
In such cases, the business owner must pay federal income tax on this income, but no state tax (again, because Texas does not tax personal income).
Most Texas partnerships, including limited partnerships (LPs) and limited liability partnerships (LLPs), are subject to franchise tax.
If you are a Texas business owner considering forming a partnership, a qualified tax accountant can help you decide how to structure your partnership for the most advantageous tax treatment given your specific circumstances. .
How many states have no corporate income tax?
Currently, there are six states in the United States that do not impose a corporate tax, although some states, such as Texas, impose franchise or gross receipts taxes on certain companies. Her only two states, South Dakota and Wyoming, do not impose either type of tax.
Does Texas have a sales tax?
Yes, Texas charges a 6.25% sales and use tax on all retail sales, leases, and rentals of most products and taxable services such as cable television, Internet access, and dry cleaning. Cities, counties, and other local taxing jurisdictions in Texas can also impose sales and use taxes of up to 2%, for a total tax rate of 8.25%.
Does Texas tax business assets?
Texas does not impose property taxes at the state level. However, local governments have the power to tax both real estate and personal assets. For businesses, personal assets include office furniture, fixtures, equipment, machinery,
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conclusion
Texas has relatively low tax rates for businesses, and some small businesses pay no taxes at all. Additionally, there are no personal income taxes, which saves business owners money. This combination makes Texas an attractive state to start and operate a small business.
