Unlike many states, Texas does not impose a traditional corporate income tax. Instead, it levies a franchise tax, which is a type of gross receipts tax. This means that businesses are taxed based on their total revenue rather than their net income. The franchise tax applies to most entities, including corporations, limited liability companies and partnerships, with rates varying depending on the revenue threshold.
A financial advisor can help Texas business owners understand how this tax works, ensure compliance and optimize their financial strategies.
How Businesses Are Taxed in Texas
Along with a handful of other states, Texas does not impose state income taxes on individuals. And, rather than a corporate income tax, the state relies on a franchise tax. Other states also levy franchise taxes using different approaches, including flat taxes. Texas's method employs a “margin tax.” This tax is calculated based on a business’s total revenue, after certain deductions, rather than on its net income.
The franchise tax in Texas may apply to any business entity with gross receipts exceeding a certain threshold, which is periodically adjusted for inflation. The threshold is set so that the tax applies to most non-exempt businesses operating within its borders.
In addition to the franchise tax, the state imposes a broad-based sales tax on all retail sales, leases and rentals of most goods, as well as taxable services. The state sales tax rate is 6.25%, but local jurisdictions can impose additional sales taxes, bringing the total rate to as high as 8.25% in some areas.
Businesses are responsible for collecting and remitting the proper amount of sales tax to the state. With this in mind, it's important for them to understand which products and services are taxable and to maintain accurate records of all transactions.
In addition to a higher-than-usual sales tax, Texas has one of the highest average property tax rates in the nation. Because sales and property taxes fall more heavily on businesses, even without a state corporate income tax, the percentage of state tax revenues paid by businesses is relatively high compared to some states regarded as high-tax jurisdictions. This is particularly true for capital-intensive businesses but is less so for service industry firms.
Given the complexities of business taxation in Texas, consulting with a financial advisor can be invaluable. A knowledgeable advisor can help businesses navigate the intricacies of the franchise tax, identify applicable exemptions and deductions, and ensure compliance with sales and property tax obligations.
Understanding Texas Corporate Tax Rates
The Texas franchise tax is levied on most businesses in the state, including corporations, limited liability companies (LLCs) and partnerships operating in the state. Trusts, professional associations and joint ventures are also subject to the franchise tax. Sole proprietorships, except for single-member LLCs, are exempt.
Businesses with a total revenue below a certain threshold, known as the “no tax due” threshold, are also exempt from paying the franchise tax. As of 2025, this threshold is set at $2.47 million, allowing many small businesses to operate without this tax burden.
The tax rate varies depending on the type of business and its total revenue. For most entities, the rate is 0.375% for wholesalers and retailers and 0.75% for other businesses.
To determine the amount owed, businesses must calculate their total revenue and apply the appropriate tax rate. The franchise tax is based on the margin, which can be calculated in several ways: total revenue minus cost of goods sold, total revenue minus compensation or total revenue times 70%.
An important feature of the Texas franchise tax is that businesses can choose the method that results in the lowest tax liability. This flexibility allows companies to optimize their tax strategy and potentially reduce their tax burden.
Tax Benefits for Businesses in Texas
The absence of a state income tax is a significant advantage for businesses operating in Texas. This policy not only benefits individuals but also enables businesses to reinvest more of their earnings into growth and development. The lack of a state income tax can be particularly appealing to entrepreneurs and established companies looking to maximize their profitability.
Beyond tax policies, Texas offers a range of incentives designed to stimulate economic growth and attract businesses. The Texas Enterprise Fund, for example, provides financial incentives to companies that create jobs and invest in the state. Additionally, the Skills Development Fund offers grants to businesses for workforce training, helping to ensure that companies have access to a skilled labor pool.
Bottom Line
Texas does not impose a traditional corporate income tax. Instead, it levies a franchise tax, which is calculated based on a company’s margin. This unique approach can be advantageous for businesses, as it often results in a lower tax burden compared to states with standard corporate income taxes. However, it’s essential for companies to accurately calculate their margins to ensure compliance and avoid penalties.
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