Introduction
Texas continues to be one of the most business-friendly states in the U.S., attracting entrepreneurs with no state income tax, a strong economy, and low regulatory barriers.
Whether you’re launching a startup, forming an LLC, or expanding an existing business, understanding Texas tax laws can help you minimize costs and stay compliant from day one.
This guide walks you through how to start a business in Texas and highlights key tax-saving strategies for 2025 every owner should know.
Step 1: Choose the Right Business Structure
Selecting the proper business structure affects your tax liability, compliance, and reporting obligations.
Here’s how the main options compare:
| Entity Type | Tax Treatment | Key Advantage |
|---|---|---|
| Sole Proprietorship | Income reported on personal return (Form 1040, Schedule C) | Simple and low-cost setup |
| Partnership | Pass-through taxation via Form 1065 | Shared management and liability |
| LLC (Single or Multi-Member) | Default pass-through or elect S-Corp/C-Corp status | Flexibility and liability protection |
| Corporation (C-Corp) | Separate entity paying federal tax (Form 1120) | Ideal for raising capital and growth |
Example:
A small consulting firm may benefit from an LLC with S-Corp election to save on self-employment taxes while maintaining liability protection.
Step 2: Register Your Business with the State
All new Texas businesses must register with the Texas Secretary of State (SOS) and, in most cases, obtain a sales tax permit from the Texas Comptroller of Public Accounts if selling taxable goods or services.
Steps to Register:
- Choose a unique business name.
- File your formation documents (e.g., Certificate of Formation for LLC).
- Obtain an Employer Identification Number (EIN) from the IRS.
- Apply for local permits or occupational licenses, if required.
- Open a separate business bank account.
This registration process establishes your legal identity and ensures eligibility for tax and credit benefits.
Step 3: Understand Your Texas Tax Obligations
Texas does not impose a personal income tax on business owners, but your company may still owe:
- Franchise Tax: Applies to entities with revenue exceeding $2.47 million (2025 threshold).
- Sales and Use Tax: 6.25% state rate plus up to 2% local tax for taxable goods or services.
- Property Tax: On real property and certain business assets like equipment or inventory.
- Employment Taxes: Federal payroll, Social Security, and Medicare taxes for employees.
Example:
An LLC earning $1.5 million in revenue may owe no franchise tax due to being below the threshold but must still file an annual no-tax-due report.
Step 4: Take Advantage of Texas Tax Incentives
Texas offers several tax incentives designed to promote business investment and job creation:
- Texas Enterprise Zone Program
- Refund of state sales and use taxes for companies creating jobs in designated areas.
- Texas Research and Development (R&D) Tax Credit
- Credit against the Texas Franchise Tax for qualified research expenses.
- Texas Manufacturing Exemption
- Exempts machinery and equipment used in production from sales tax.
- Renewable Energy and Data Center Incentives
- Tax reductions for companies investing in renewable energy or digital infrastructure.
These programs can significantly reduce both upfront and recurring state tax costs.
Step 5: Federal Tax Deductions for New Businesses
New Texas business owners can also take advantage of federal deductions allowed under the Internal Revenue Code:
- Start-Up Cost Deduction (IRC §195): Deduct up to $5,000 in qualifying startup expenses.
- Home Office Deduction: Deduct part of rent, utilities, and depreciation if you use a portion of your home exclusively for business.
- Depreciation (§179 and Bonus): Deduct the full cost of qualifying equipment and technology.
- Qualified Business Income Deduction (IRC §199A): Deduct up to 20% of qualified business income for pass-through entities.
Example:
If your startup spends $10,000 on initial marketing and website setup, you may deduct $5,000 immediately and amortize the remaining $5,000 over five years.
Step 6: Optimize Accounting and Recordkeeping
Maintaining accurate financial records is essential for audit protection and tax efficiency.
Best practices include:
- Using accounting software to track income and expenses.
- Keeping digital receipts and invoices for all business transactions.
- Reconciling bank accounts monthly.
- Separating personal and business finances.
Strong bookkeeping helps you identify deductible expenses and prepare accurate tax filings each year.
Step 7: Plan for Payroll and Employee Taxes
If your Texas business hires employees, you must:
- Register with the Texas Workforce Commission for state unemployment tax.
- Withhold and remit federal income tax, Social Security, and Medicare.
- Provide Form W-2 to employees and file Forms 941/940 with the IRS.
For contractors, issue Form 1099-NEC for payments exceeding $600 per year.
Step 8: Year-Round Tax Planning
Smart tax planning is not a once-a-year event.
To stay tax-efficient:
- Estimate quarterly federal taxes to avoid penalties.
- Track deductible business mileage and travel costs.
- Consider retirement plans like a SEP IRA or Solo 401(k).
- Review financial statements quarterly with a CPA for optimization opportunities.
Proper planning ensures cash flow stability and compliance with both state and federal requirements.
Conclusion
Starting a business in Texas offers unmatched advantages no state income tax, a thriving economy, and multiple tax incentives.
By selecting the right entity, claiming eligible credits, and maintaining organized financial records, entrepreneurs can launch confidently and legally reduce their tax burden in 2025.
A strong foundation today ensures long-term profitability and compliance for tomorrow.
Call to Action
For expert assistance in starting a business in Texas and maximizing available tax savings, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent admitted to practice before the IRS, and cross-border tax expert helping Texas entrepreneurs with business formation, compliance, and tax planning.
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. Always consult a licensed CPA before making business formation or tax decisions.
Top 5 FAQs
- Do new businesses in Texas pay state income tax?
No. Texas does not impose a state income tax on individuals or businesses. - What taxes must Texas businesses pay?
Franchise tax, sales and use tax, property tax (if applicable), and federal payroll taxes. - What is the franchise tax threshold for 2025?
Businesses with total revenue below $2.47 million owe no franchise tax but must still file an annual report. - Are there tax credits for new businesses in Texas?
Yes. Programs like the R&D Tax Credit and Enterprise Zone refunds can reduce state tax liability. - How can I deduct my startup costs?
You can deduct up to $5,000 in qualifying startup expenses under IRS §195.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the United States, Enrolled Agent admitted to practice before the IRS, and cross-border tax expert assisting Texas entrepreneurs with entity formation, accounting automation, and federal and state compliance.