Texas Corporate Tax: Everything You Need to Know
Texas corporate tax is referred to in the state of Texas as a franchise tax. When the state taxes most businesses, it is at a rate of one percent on the business's taxable margins.3 min read
2. Information About the Franchise Tax
3. Most Common Texas Business Types
Texas corporate tax is referred to in the state of Texas as a franchise tax. When the state taxes most businesses, it is at a rate of one percent on the business's taxable margins. The definition of the lowest number is based on one of three figures: 70 percent of the company's total revenue, 100 percent of the revenue minus the cost of goods sold, or 100 percent of the revenue minus the total compensation.
Information About Texas as a Business Location
One thing about Texas that continues steadily is its popularity as a location to conduct business. The figures for the state's unemployment and the growth of its job market attests to its desirability as a state for business opportunities. The unemployment rate as of 2015 showed a rate of 4.1 percent, which was one percentage point lower than the national unemployment rate.
Several reasons promote Texas as a favorable state for businesses. These include:
- A positive tax climate.
- Texas has low business taxes, and personal income is nonexistent.
- Businesses can keep more of the company's profits due to low taxes, and businesses can use personal income taxes as an incentive when hiring new employees.
- In some cases when the revenues of a business do not exceed certain thresholds, the tax rate drops to zero.
- Small businesses just starting out have an opportunity to flourish and grow in the Texas tax climate.
Information About the Franchise Tax
The way the franchise tax works is relatively easy and straightforward. Most business types in Texas are subject to the franchise tax. The exceptions to not paying the franchise tax are for some general partnerships and sole proprietorships. Limited liability partnerships and limited liability companies (LLCs) are subject to paying the franchise tax.
- The franchise tax of wholesale and retail companies is 0.5 percent regardless of the size of the business.
- A business earning an annual revenue of $10 million or less pay 0.575 percent when using the state's E-Z Computation form.
- Using the E-Z Computation Form for deducting temporary credits or economic development, compensation, or cost of goods sold (COGS) is not allowed.
- Businesses in 2015 that earned revenue of less than $1.08 million had no franchise tax at all. This is referred to as the no-tax-due threshold.
Most Common Texas Business Types
Most small businesses are not set up as a corporation, but at some point, the owner will switch from a limited liability company or S corporation to a C corporation business structure when the business has reached a certain level of growth.
The treatment for corporations when it comes to taxes is clear and to the point. Texas, like most states, requires corporations to pay a franchise tax. The E-Z Computation rules and no-tax-due threshold apply to corporations.
An S corporation provides businesses benefits under this business structure. Where a C corporation is subject to separate income tax and separate federal income tax, S corporations are not. With an S corporation, the shareholders are taxed based on the equity they have in the company. These are reasons that make the S corporation structure popular among small business owners.
S corporations are still responsible for the franchise tax based on the annual revenue of the business. The one percent tax rate remains the same and shareholders do not pay any state taxes on income received from the company.
Limited Liability Companies (LLCs)
Limited liability companies are the next most popular business structure for small businesses. In most states, a limited liability business structure protects its owners from certain legal liabilities. An LLC structure also passes the income of the company to the owners, who in turn pay personal income tax as an individual versus paying income tax as a business.
Texas does charge LLCs a franchise with the same rules in place that apply to other businesses. The income passed through to the owners is not subject to state income tax.
Partnerships and Sole Proprietorships
If a business is owned directly by a person(s) and the income is distributed to that person(s), the business is treated like a sole proprietorship and not subject to the franchise tax. The owners will pay federal income tax but not state tax.
The majority of businesses set up as a limited liability partnership (LLP) or limited partnerships (LP) are subject to the franchise tax.
If you need help with Texas corporate tax, you can post your legal need on the UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.