Texas Small Business Tax Strategies (2026)
Texas charges no individual income tax — so the real money for business owners in Houston, Dallas, and Austin is in federal optimization. Here's the 2026 playbook.
Texas Tax Quick Facts (2026)
Tax Overview for Texas Business Owners
Texas combines zero income tax with a franchise tax that exempts most small businesses. High property taxes are the main tax concern for Texas business owners.
Texas has no individual or corporate income tax. However, the Texas Franchise Tax (also called the margin tax) applies to businesses with revenue over $2.47 million at a rate of 0.375% - 0.75%. Most small businesses are exempt.
Texas State-Specific Tax Details (2026)
Pass-Through Entity (PTE) Tax Election
Texas has NO PTE/PTET election because it imposes no individual income tax. The Texas Constitution (Art. 8, Sec. 24-a, added by 2019 Proposition 4) prohibits a tax on the net income of individuals. A PTET only functions as a federal SALT-cap workaround in states with an individual income tax to credit/deduct against, so there is nothing for a Texas PTET to offset. Texas owners get no PTET benefit on Texas-source income.
Local & City Income Taxes
None. Texas has no state individual income tax (constitutionally prohibited via 2019 Proposition 4) and no city or county income/wage tax. Local jurisdictions raise revenue through property tax and local sales/use tax (up to an additional 2.00% on top of the 6.25% state sales tax), not income tax.
Entity-Level & Franchise Taxes
Texas imposes an entity-level FRANCHISE (margin) tax, NOT an income tax, and does NOT recognize the federal S-corp election -- S-corps, LLCs, and C-corps are all 'taxable entities' taxed the same way. 2026 rates: 0.75% standard, 0.375% for retail/wholesale, or 0.331% under the EZ computation (available to entities with annualized total revenue of $20M or less, but EZ filers cannot take margin deductions or franchise tax credits). No-tax-due threshold for 2026 reports is $2,650,000 of annualized total revenue (entities at/below owe no tax but most still file a Public/Ownership Information Report; reports due May 15). Tax is on 'taxable margin' (lowest of: 70% of total revenue; revenue minus COGS; revenue minus compensation, capped at $480,000/person for 2026; or revenue minus $1,000,000).
Texas Tax Credits & Incentives
Effective for franchise tax reports originally due on/after Jan. 1, 2026 (SB 2206, signed June 17, 2025). The credit equals 8.722% of qualifying Texas research expenses (10.903% if conducted with a Texas higher-education institution). It is REFUNDABLE for entities that qualify as no-tax-due/new businesses (eligibility: annualized total revenue of $2.65M or less, computed franchise tax under $1,000 for the report year, or new veteran-owned business status in its first five years) -- turning the credit into cash. Note: the prior R&D sales-and-use-tax exemption (Tax Code Sec. 151.3182) was repealed for purchases made on/after Jan. 1, 2026.
A business 100% owned by honorably discharged veteran(s) pays no franchise tax and is exempt from certain filing fees for its first five years. SB 524 (89th Legislature), effective Sept. 1, 2025, made this exemption permanent (it had been scheduled to expire Jan. 1, 2026 under the prior SB 938).
A franchise tax credit of up to 25% of eligible costs for the certified rehabilitation of certified historic structures, with a 5-year carryforward. Useful for small businesses restoring older commercial property.
A pre-revenue or small Texas startup doing R&D should plan to claim the new REFUNDABLE Subchapter T R&D credit on its 2026 franchise report: even if the business is under the $2.65M no-tax-due threshold and owes zero franchise tax, the 8.722% credit can be paid out as cash -- provided it meets the refundability criteria (revenue =< $2.65M, computed tax < $1,000, or new veteran-owned status) and files the federal IRS Form 6765 with the Texas application. Note the old R&D sales-and-use-tax exemption was repealed for purchases on/after Jan. 1, 2026, so the franchise-tax credit is now the path. Also watch the $480,000-per-person compensation deduction cap when structuring owner pay to minimize taxable margin. Confirm the 50% liability-cap mechanics and exact filing forms with a Texas tax professional or the Comptroller before filing.
Top Tax Strategies for Texas Business Owners
Since Texas has no individual income tax, your tax planning should focus almost entirely on federal tax optimization. The strategies below target federal tax savings that every Texas business owner should implement.
No income tax — focus on federal optimization
Texas Franchise Tax (margin tax) planning
Maximize retirement contributions
S-Corp for federal SE tax savings
S-Corp Election in Texas
For Texas business owners with net income above $50,000, electing S-Corp status can save $5,000 to $20,000+ annually in self-employment taxes. As an S-Corp, you pay yourself a "reasonable salary" and take the remaining profits as distributions, which are not subject to the 15.3% self-employment tax. Because Texas levies no individual income tax, the S-Corp election is purely a federal play for you — every dollar of self-employment tax you avoid is a dollar kept, with no state-level offset to worry about.
Example: A Houston S-Corp
A Houston business owner earning $150,000 in net business income pays themselves a reasonable salary of $60,000. The remaining $90,000 in distributions avoids the 15.3% SE tax, saving $13,770 in self-employment taxes alone — and with no Texas income tax, none of it is clawed back at the state level.
Retirement Plan Strategies for Texas
Retirement plan contributions are the single most powerful tax deduction available to Texas business owners. A Solo 401(k) allows contributions up to $69,000 in 2026 ($76,500 if you're 50+), generating tax savings of $17,000 to $24,000 at a 25-32% effective tax rate. And because Texas has no state income tax, that deduction works entirely at the federal level — no state return to optimize against.
SALT Deduction Impact in Texas
No income tax — SALT only from property and sales taxes. Property taxes are among the highest in the nation. The federal SALT (State and Local Tax) deduction cap increases from $10,000 to $40,000 in 2026, providing meaningful relief for business owners in states with income taxes.
Best Business Entities for Texas
The most popular business entity types for Texas small business owners are:
Choosing the right entity depends on your income level, growth plans, and Texas's specific tax treatment. Read our complete S-Corp vs LLC comparison guide for a detailed breakdown.
Texas Tax FAQs
What is the income tax rate in Texas?
Texas has an individual income tax rate of 0%. Texas has no individual or corporate income tax. However, the Texas Franchise Tax (also called the margin tax) applies to businesses with revenue over $2.47 million at a rate of 0.375% - 0.75%. Most small businesses are exempt.
What are the best tax strategies for small businesses in Texas?
Key tax strategies for Texas business owners include: No income tax — focus on federal optimization, Texas Franchise Tax (margin tax) planning, Maximize retirement contributions, S-Corp for federal SE tax savings. Texas combines zero income tax with a franchise tax that exempts most small businesses. High property taxes are the main tax concern for Texas business owners.
Is Texas a good state for small business taxes?
Texas combines zero income tax with a franchise tax that exempts most small businesses. High property taxes are the main tax concern for Texas business owners.
What is the corporate tax rate in Texas?
Texas's corporate tax rate is 0% (franchise tax instead). The sales tax rate is 6.25%.
How does the SALT deduction affect Texas business owners?
No income tax — SALT only from property and sales taxes. Property taxes are among the highest in the nation. In 2026, the federal SALT deduction cap increases to $40,000, which benefits business owners in states with higher tax burdens.
Find Out How Much You Can Save in Texas
Our free tax savings calculator analyzes your specific situation and shows you exactly where Texas business owners are leaving money on the table.
Calculate Your Texas Tax SavingsNo Income Tax States Like Texas
Texas business owners often compare their tax climate to other no income tax states. See how the strategies shift across the line: