Reduce Your Texas Business Taxes
While Texas is known for its no personal income tax, businesses operating in the state are still subject to several other taxes, including the Texas Franchise Tax, sales tax, and property taxes.
Fortunately, the Texas Tax Code offers multiple ways for businesses to legally reduce their tax liability through deductions, exemptions, credits, and strategic planning.
This guide explains the most effective and compliant methods to minimize Texas business tax in 2025.
Step 1: Confirm Your Franchise Tax Threshold Status
The Texas Franchise Tax applies to most entities, but many small businesses owe no tax due to the state’s high exemption threshold.
For 2025, businesses with total revenue of $2.47 million or less pay no franchise tax but must still file a No Tax Due Report with the Texas Comptroller.
Action Tip:
Even if you owe no tax, file on time (by May 15, 2025) to avoid forfeiting your entity’s good standing or incurring penalties.
Step 2: Deduct Cost of Goods Sold (COGS) or Compensation
If your business exceeds the threshold, Texas allows you to calculate taxable margin using the most favorable deduction method:
- COGS Deduction:
Subtract direct production or resale costs (materials, supplies, labor, depreciation on equipment).
Best for manufacturing, retail, or wholesale businesses. - Compensation Deduction:
Subtract W-2 wages, benefits, and employer-paid health insurance.
Ideal for service-oriented businesses.
Example:
A construction LLC with $4 million in revenue and $1.5 million in COGS can deduct those costs to reduce its taxable margin cutting its franchise tax significantly.
Step 3: Claim the Texas R&D Tax Credit
Businesses engaged in qualified research activities within Texas may claim the Research and Development (R&D) Tax Credit to offset franchise or sales tax.
Qualifying activities include designing new products, improving software, or developing prototypes.
Credit Options:
- Franchise Tax Credit: Up to 5% of eligible research expenses.
- Sales Tax Exemption: On qualifying R&D equipment and supplies.
Example:
A software startup investing $500,000 in R&D wages and testing may qualify for up to $25,000 in franchise tax credits.
Step 4: Use the Texas Enterprise Zone Program
The Texas Enterprise Zone Program provides state sales and use tax refunds for businesses investing in economically distressed areas.
To qualify:
- The business must create or retain jobs.
- The project must be approved by the local governing body and the Texas Governor’s Office.
Refunds are based on the number of jobs created, ranging from $2,500 to $7,500 per employee.
Step 5: Take Advantage of Manufacturing and Energy Exemptions
Texas offers several sales tax exemptions for specific industries:
- Manufacturing Exemption
- Equipment and raw materials used in manufacturing are exempt from sales tax.
- Natural Gas and Electricity Exemption
- Utilities used directly in manufacturing or processing are exempt.
- Pollution Control Property Exemption
- Equipment installed to reduce emissions or waste qualifies for property tax exemption.
Example:
A Houston manufacturing firm investing $1 million in new equipment can save over $80,000 in sales tax using the manufacturing exemption.
Step 6: Plan for Multi-State Income Apportionment
If your business operates both in and outside Texas, you can apportion revenue to reduce your taxable margin.
Texas taxes only revenue earned from business conducted within the state.
Formula:
Texas Gross Receipts ÷ Total Gross Receipts = Texas Apportionment Factor
Example:
If your company earns $8 million total revenue, with $3 million from Texas clients, only 37.5% of income is subject to Texas franchise tax.
Step 7: Deduct Business Expenses for Federal and State Coordination
Though Texas does not have an income tax, maximizing federal deductions directly reduces your taxable income for IRS purposes, which indirectly lowers total business costs.
Key deductible expenses include:
- Rent, utilities, and professional services.
- Advertising and marketing costs.
- Depreciation under IRC §179.
- Employer contributions to retirement plans and health insurance.
Proper expense tracking ensures your business benefits from both federal tax savings and reduced taxable margins for franchise calculations.
Step 8: Avoid Penalties and Late Fees
Late filings can negate tax savings.
Common penalties include:
- 5% of tax due if filed up to 30 days late.
- 10% of tax due after 30 days.
- Interest accrues daily after delinquency.
Maintaining timely filings with the Texas Comptroller protects your entity status and avoids unnecessary costs.
Conclusion
Reducing your Texas business tax legally requires careful planning, accurate recordkeeping, and knowledge of the available credits and deductions.
By leveraging the COGS or compensation deduction, R&D credits, enterprise incentives, and industry exemptions, Texas businesses can maintain compliance while minimizing tax exposure in 2025.
Strategic coordination between state and federal tax planning ensures long-term efficiency and profitability.
Call to Action
For professional guidance on optimizing Texas business tax liability, contact Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant, Enrolled Agent authorized to practice before the IRS, and cross-border tax expert assisting Texas businesses with franchise tax planning, compliance, and audit protection.
Disclaimer
This article is for informational purposes only and should not be construed as legal or tax advice. Always consult a CPA before applying any tax-saving strategies.
Top 5 FAQs
- What is the easiest way to reduce Texas business tax?
Use the COGS or compensation deduction to minimize your taxable margin under the franchise tax. - Are there tax credits for Texas businesses?
Yes. The Texas R&D Credit and Enterprise Zone Program can reduce franchise or sales tax. - Does Texas offer sales tax exemptions for manufacturers?
Yes. Machinery, raw materials, and electricity used in manufacturing are exempt. - Can I apportion income if I operate in multiple states?
Yes. Only revenue sourced from Texas is taxable under state franchise rules. - What happens if I don’t file on time?
Late filing can trigger penalties, interest, and potential forfeiture of entity status.
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 and corporations with business tax planning, state compliance, and audit readiness.