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Taxes on Business Income in Texas

Filed under State Taxes. Fact checked on February 13, 2013.

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Franchise tax, based on the amount of revenue attributable to Texaa is required from most business entities, including corporations, S corporations, and limited liability companies doing business in Texas. Personal income tax is not imposed in Texas.

Most Business Entities Subject to Franchise Tax

The Texas franchise tax is imposed on each taxable entity that does business in Texas, or that is chartered or organized in Texas, at a rate of 1 percent per year. The tax is imposed on the lesser of the following.

  • 70 percent of the total revenues or
  • 100 percent of gross receipts after deductions for either compensation or cost of goods sold.

A business is exempt from tax if either of these conditions is met:

  • the tax owed is $1,000 or less, or
  • the business has $1,030,000 or less in annualized total revenue.

Entities subject to tax. A "taxable entity" means a partnership, corporation, banking corporation, savings and loan association, limited liability company, business trust, professional association, business association, joint venture, joint stock company, holding company, or other legal entity, including a combined group. The term does not include:

  • sole proprietorships;
  • a general partnership, the direct ownership of which is entirely composed of natural persons;
  • a passive entity; and
  • entities exempt from the current franchise tax, such as certain insurance companies, railroad terminal corporations, open-end investment companies, and nonprofit companies.
Work Smart

The fact that Texas doesn't impose a personal income tax can make your choice of entity for operating your business more important than ever. If it is possible to set up your business as a sole proprietorship or partnership, you will not have to pay Texas tax on your income. Of course, business considerations other than state tax implications must be taken into account when making a decision as to how to best operate your business. You may want to consult with your financial professional when making this important decision.

Lower rate applies to retail and wholesale businesses. The tax rate will be 0.5 percent per year for those taxable entities primarily engaged in retail or wholesale trade. The 0.5 percent rate applies to the lesser of 70 percent of total revenues or 100 percent of gross receipts, as adjusted.

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