Small Business Taxes in Texas: How They Work and What You’ll Pay – Investopedia

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Texas has the second-largest economy in the U.S. (after California), with a state gross domestic product of $2.40 trillion in 2022. Much of that money is made in the oil and gas industry, though farming, steel, banking, and tourism are also big contributors. Part of the reason for the size of its economy may be that Texas, in the 21st century, has a very pleasant business climate.

Key Takeaways

  • Texas doesn’t have a business income tax but imposes a franchise tax on certain businesses.
  • Businesses with revenues under $2.47 million pay no tax.
  • Businesses with revenues of $20 million or less pay 0.331%.
  • Larger businesses pay either 0.375% or 0.75%, depending on the type of business.

Taxes in Texas: Overview

Compared to most states, business taxes are extremely low in Texas, and there is no personal income tax. This gives Texas two distinct competitive advantages over many other states—businesses keep more of the money they make, and they can recruit top talent by citing the lack of personal income taxes.

The news is even better for small businesses. The business tax rate, which is already low, shrinks or drops to zero for businesses whose revenues do not exceed certain thresholds. For a small business just starting out, this can ease the strain of those tenuous early years.

Texas does not have a corporate income tax. Instead it imposes a franchise tax on some businesses. The difference between a corporate income tax and a corporate franchise tax is that income taxes apply to profit while franchise taxes do 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’s worth emphasizing that this is a tax on gross receipts, not on net corporate income. Texas is one of only four states with this type of system. The others are Nevada, Ohio, and Washington.

Texas Business Taxes by Size and Nature of Business

Small businesses with annual receipts below a certain level pay no franchise tax at all. This is known as the no-tax-due threshold. For the tax years 2024 and 2025, that threshold is $2,470,000.

Businesses with annual revenues over the threshold but not greater than $20 million pay 0.331% on the portion of their revenue that is attributable to Texas (known as apportionment). They can file using an E-Z Computation Report form (and this form really is easy—it’s a one-pager). Note that the EZ Computation form does not allow certain deductions and credits that businesses may otherwise be eligible for, specifically deductions for cost of goods sold (COGS) or compensation, or economic development or temporary credits.

Businesses that cannot file the E-Z Computation form are taxed at different rates depending on the nature of the business. The tax for wholesalers and retailers is 0.375%. The tax rate for businesses other than retail and wholesale is 0.75%. In these cases, the tax is applied to what the state calls their taxable margins. It defines that as the lowest of the following: 70% of total revenue, 100% of revenue minus cost of COGS, 100% of revenue minus total compensation, or total revenue minus $1 million.

Texas Business Taxes by Structure of Business

Regardless of how they are structured, nearly all businesses in the state are subject to the franchise tax. The only exceptions are sole proprietorships and certain types of general partnerships. Here is a rundown:

C Corporations

Most small businesses are not corporations, but they sometimes switch from LLCs and S corporations to C corporations when their growth reaches a certain level. Like most states, Texas subjects corporations to its standard business tax, in this case, the franchise tax. As with all businesses, the no-tax-due threshold and E-Z Computation rules apply to corporations.

S Corporations

The S corporation is a popular designation for small businesses. It provides many of the benefits of incorporating but, unlike the C corporation, it is not subject to separate federal income tax or, in most states, a separate state income tax. Instead, the corporation’s income is passed through to shareholders, who are then taxed on it individually.

Texas, however, still subjects S corporations to its franchise tax based on the business’s annual revenue. Individual shareholders in the company do not have to pay Texas state taxes on their portions of the company’s income.

This benefit is especially attractive to small S corporations whose annual revenues do not exceed the no-tax-due threshold. They operate essentially tax-free since tax is not assessed on the business itself or on the individuals who earn income from the business.

Limited Liability Companies

A limited liability company (LLC) is the other common designation for small businesses. In most states, LLCs are entities that protect business owners from certain legal liabilities while passing their income through to those owners, who pay personal income tax on it.

As with S corporations, Texas bucks the national trend and charges the franchise tax to LLCs, with the same rules that apply to other business types. However, the income that passes to the owners as personal income is not subject to state income tax in Texas (because Texas has no personal income tax).

Partnerships and Sole Proprietorships

Most Texas small businesses that are partnerships pay the franchise tax, while sole proprietorships do not. The litmus test in a partnership is whether the business is directly owned by individuals, with the business income distributed directly to those individuals. In these situations, Texas treats partnerships like sole proprietorships and does not impose the franchise tax.

In such cases, the business owners must pay federal income tax on this income but not state tax, (again since Texas does not tax personal income).

The majority of partnerships in Texas, including limited partnerships (LPs) and limited liability partnerships (LLPs), are subject to the franchise tax.

For business owners in Texas considering forming a partnership, a qualified tax accountant can help determine how to structure the partnership for the most favorable tax treatment given the particular circumstances.

How Many States Have No Corporate Income Tax?

Currently, there are six U.S. states that do not have a corporate income tax, although some, like Texas, levy a franchise or gross receipts tax on certain businesses. Only two states, South Dakota and Wyoming, levy neither type of tax.

Does Texas Have a Sales Tax?

Yes, Texas levies a 6.25% sales and use tax on all retail sales, leases, and rentals of most goods, as well as on taxable services, such as cable TV, 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%, bringing the combined rate as high as 8.25%.

Does Texas Tax Business Property?

Texas does not tax property on the state level. However local jurisdictions have the authority to tax both real property and personal property. In the cases of businesses, personal property can include such things as office furniture, fixtures, equipment, machinery, and
inventory.

The Bottom Line

Texas has relatively low tax rates on businesses, and some small businesses pay no tax at all. In addition, it has no personal income tax, which can save business owners money. That combination has made Texas an attractive state in which to start and run a small business.

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