Does Texas Tax Business Income? An Expert's Guide

Learn about how Texas taxes businesses from an expert's perspective. Find out what types of businesses are subject to franchise tax in Texas and what exemptions may apply.

Does Texas Tax Business Income? An Expert's Guide

Texas is one of only five states that do not charge any business taxes, personal income taxes or fees to sole proprietors, allowing them to invest a greater part of their profits in their businesses. The others are Alaska, Florida, South Dakota and Wyoming. Your company's income will be distributed to you as a sole proprietor and you will pay federal taxes on that income. However, because Texas has no personal income tax, other than interest and dividends, you will not owe the state taxes on your company's income. If you sell physical products (such as electronics, books, cars, furniture, appliances, raw materials, etc.), you will need to send the taxes you collect to the Texas Comptroller's Office.

In Texas, some items such as medicines and some grocery items are exempt from sales tax. The State Administrative Code, Title 34, Part 1, Chapter 3, Subchapter O, contains an extensive list of Texas sales tax rules and exemptions applicable to numerous organizations, services and products. The Texas sales tax rate is 6.25 percent statewide. Local tax jurisdictions, such as cities and counties, can also impose sales taxes at a rate of up to 2 percent for a total maximum combined rate of 8.25 percent.

Use our sales tax calculator to get an idea of what you'll have to pay, but always check with your accountant and the Texas Comptroller to find out if your company is required to collect sales taxes and make sure you continue to comply. An individual member does not owe state taxes on any part of the company's net income that he ultimately receives. Consult with your accountant or tax advisor for more information on how to lower your LLC's self-employment tax through an S corporate tax election. The Texas franchise tax rate depends on the amount of income your business generates and a few other factors. Texas does not impose an income tax on corporations, nor does it impose a state tax on individual income. In addition, individual LLC members will not owe taxes to the state on their respective portions of the company's net income.

Therefore, while your Texas business may be subject to franchise tax, any income remaining after these taxes that is transferred to you personally, for example from an S corporation, LLC or limited liability company (LLP), will not be subject to additional taxes on your personal state tax return. See Franchise Tax Rule 3,586 for a list of some activities that are considered “doing business” in Texas. The tax applies to corporations, limited liability companies, corporations (general, limited and limited liability), commercial trusts, professional associations, trade associations, joint ventures and other legal entities organized in Texas or doing business in Texas. While Texas does recognize federal election S status for S corporations they are still subject to state franchise tax. The State Administrative Code, Title 34 Part 1 Chapter 3 Subchapter O contains an extensive list of Texas sales tax rules and exemptions applicable to numerous organizations services and products. However for qualified wholesalers and retailers (that is generally companies that are primarily engaged in wholesale or retail) the rate is 0.375%.

A single-rate system minimizes the incentive for businesses to engage in economically wasteful tax planning to mitigate the damage of the higher marginal tax rates that some states charge as taxable revenues increase. Items 1 and 2 are subject to transferred tax for owners managers and LLC members who receive profits from the business. In addition a Texas corporation dedicated exclusively to the business of manufacturing selling or installing solar energy devices is exempt from franchise tax. Texas has a franchise tax that applies to most Texas businesses, except sole proprietorships and certain general partnerships (those where all partners are individuals rather than companies or other entities). Excise tax is payable if your company uses several types of facilities equipment or products receives payment for certain services operates certain types of businesses or manufactures or sells certain products.

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