Texas has the second largest economy in the United States after California, with a gross state product of $2.4 trillion in 2022. Much of this comes from the oil and gas industry, but agriculture, steel, banking, and tourism also make significant contributions. One reason for the state's large economy may be that Texas has a very favorable business environment in the 21st century.
Key Takeaways
Texas does not have a business income tax, but certain businesses are subject to a franchise tax. Businesses with revenues under $2.47 million are not taxed. Businesses with revenues up to $20 million are subject to a 0.331% tax. Larger corporations are subject to a 0.375% or 0.75% tax, depending on the type of business.
Texas Taxes: Overview
Texas has very low business taxes compared to most states and no personal income tax, which gives Texas two distinct competitive advantages over many other states: businesses get to keep more of the money they make, and the lack of a personal income tax means they can hire top talent.
For small businesses, it's even better news: already low business tax rates will be reduced or eliminated for businesses whose revenues don't exceed certain thresholds. This can ease the precarious start-up burden for small businesses just starting out.
Texas does not have a corporate income tax. Instead, it imposes a franchise tax on some corporations. The difference between a corporate income tax and a corporate franchise tax is that an income tax applies to profits, while a franchise tax does not. A franchise tax is essentially a fee that corporations 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 net corporate profits. Texas is one of only four states that have this type of system; the other three are Nevada, Ohio, and Washington.
Texas Business Taxes (by Business Size and Type)
Small businesses with annual revenues below a certain amount don't have to pay any franchise tax at all. This is known as the zero-tax limit. For the 2024 and 2025 tax years, this limit is $2,470,000.
Businesses with annual revenues over the threshold but below $20 million pay 0.331% on the portion of revenues attributable to Texas (called an apportionment).You can file using the EZ Calculation report form (this form is very easy, as it's only one page).It's important to note that the EZ Calculation form does not allow certain deductions and credits that businesses are typically eligible for, specifically deductions for cost of goods sold (COGS) and compensation, as well as economic development and temporary credits.
Businesses that can't file an EZ calculation form are taxed at different rates depending on the nature of their business: Wholesalers and retailers have a tax rate of 0.375%. Non-retail and non-wholesale businesses have a tax rate of 0.75%. In these cases, the tax is applied to what the state calls the taxable margin, which states define as the lowest of the following: 70% of gross revenues, 100% of revenues less cost of goods sold, 100% of revenues less total compensation, or $1 million less gross revenues.
Texas Business Taxes by Business Structure
Regardless of structure, nearly all businesses in the state are subject to franchise tax. The only exceptions are sole proprietorships and certain types of partnerships. Here's a summary:
C Corporation
Many small businesses are not incorporated, but may switch from an LLC or S corporation to a C corporation once they reach a certain level of growth. Like most states, Texas imposes standard business taxes on corporations (in this case, franchise taxes). Like all businesses, corporations are subject to tax-exempt limits and EZ calculation rules.
S Corporation
An S corporation is a name often used for small businesses. It has many of the benefits of incorporation, but unlike a C corporation, it is not subject to federal income tax and, in most states, state income tax. Instead, the corporation's income is passed through to its shareholders, who are taxed individually.
However, Texas imposes a franchise tax on S corporations based on the business's annual revenues. Individual shareholders of the corporation do not have to pay Texas state tax on their own share of the corporation's income.
This benefit is especially attractive to small S corporations whose annual revenues do not exceed the tax-free limits. Because no taxes are levied on the business itself or on the individuals who earn income from the business, these corporations essentially operate tax-free.
Limited liability company
A limited liability company (LLC) is one of the more common names for a small business. In most states, an LLC is an organization that protects the business owner from certain legal liabilities while passing its income through to the business owner, who then pays personal income taxes on it.
As with S corporations, Texas bucks the national trend and imposes a franchise tax on LLCs under the same rules that apply to other business structures, except that income passed through to the owners as personal income is not subject to state income tax in Texas (because Texas does not have a personal income tax).
Partnerships and sole proprietorships
Most small businesses in Texas are partnerships and pay franchise tax, but sole proprietorships do not. The test for a partnership is whether the business is directly owned by individuals and the business income is distributed directly to those individuals. In these cases, Texas treats the partnership like a sole proprietorship and does not impose franchise tax.
In these cases, the employer must pay federal income tax on this income, but does not have to pay state tax (again, because Texas does not tax personal income).
Most partnerships in Texas, including limited liability partnerships (LPs) and limited liability partnerships (LLPs), are subject to the franchise tax.
For business owners considering forming a partnership in Texas, a qualified tax attorney can help determine how to structure the partnership for the most favorable tax treatment given their particular circumstances.
How many states have no corporate income tax?
Currently, six states in the U.S. have no corporate income tax, but some, such as Texas, impose a franchise tax or gross sales tax on certain businesses. Only two states, South Dakota and Wyoming, do not impose either type of tax.
Does Texas have sales tax?
Yes, Texas imposes a 6.25% sales and use tax on the retail sale, lease, and rental of most goods, and on taxable services, such as cable television, Internet access, and dry cleaning. Cities, counties, and other local taxing jurisdictions in Texas may also impose a sales and use tax of up to 2%, for a total tax rate of 8.25%.
Does Texas tax business property?
Texas does not tax property at the state level. However, local governments have the power to tax both real and personal property. For corporations, personal property includes things like office furniture, fixtures, equipment, and machinery.
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Conclusion
Texas has a relatively low corporate tax rate – some small businesses pay no taxes at all – and there is no personal income tax, helping business owners save money. This combination makes Texas an attractive state to start and run a small business.