Texas is one of the most business friendly states in the union. They do not have any personal or corporate income tax, however in order to generate revenue the make up for it in high property taxes and a gross margins tax.
State Income Taxes in Texas
The state of Texas is one of only 9 states in the union with no personal income tax. Additionally, they do not have a business income tax neither. This makes Texas a very favorable state to live in and set up your business.
Texas Franchise Tax
The state of Texas does not have business income tax; however, it does have a Gross Margins Tax called the Texas Franchise Tax. The Texas Franchise Tax is calculated one of four ways. In order to owe Franchise Tax, your business must have over $1,180,000 Million in total revenues. Here are the four different ways to calculate the gross margins for the Texas Franchise Tax:
- 70% of Total Revenue
- Total Revenue less Cost of Goods Sold (COGs)
- Total Revenue less Compensation (payroll)
- Total Revenue less $1,000,000
The tax is based on calendar year and is usually due by May 15th of the following year. The Texas Franchise Tax is 0.75% for all businesses except wholesalers or retailers. If your a wholesaler or retailer, your Texas Franchise tax is half the normal rate (0.375%).
Sales and Property Taxes in Texas
Sales Tax – Like many states, Texas has multiple tax rates. One at the state level and another at the local level. The state rate is 6.25% the average local rate is 1.94% (total average rate for Texas Sales Tax is 8.19%)
Property Taxes – The average property tax rate for residential property in the state of Texas is 1.69%, making it one of the more expensive places in the country to pay property tax. This is because the funding for Texas’ Independent School Districts all come from property taxes.
Texas Homestead Exemption
A homestead declaration is a state law that protects the equity of your home from creditors. Every state has different rules around homestead. You normally can only declare homestead on your primary residence. Some states, such as Texas and Idaho will also give you an additional tax break if you declare a homestead.
As we mentioned above, Texas has one of the highest property taxes in the county. A Texas homestead exemption allows you to reduce your tax appraisal by $25,000. Here’s an example: if your appraised tax value was originally $300,000, your texas homestead exemption would bring in down to $275,000. Additionally, if you’re 65 or older, or disabled, you will get an additional $10,000 exemption on top of the $25,000.
Texas Agricultural Exemption
In addition to the Texas Homestead Exemption, there is also the Texas Agricultural Exemption (or Texas Ag Exemption for short). The Texas Ag Exemption isn’t really an exemption, as it is more of a special valuation calculation on your land. This special valuation calculates your property taxes based on productive agricultural land value vs. market land value. This special valuation will save you a lot of money on property taxes, but in order to get it you must meet certain requirements
- The land must be used primarily for agriculture
- You must be engaged in a “Qualified Activity”. Some qualified activities are: farming, timber production, feedlot operations, bee keeping, horse breeding, etc.
- The land must be used for agriculture for 5 out of the last 7 years
- You must reapply for your Texas Ag Exemption every 5 years
If you lose your Texas Agricultural Exemption Status
It is very important to keep your Ag Exemption active. If you lose your Ag Exemption Status, you may be responsible for rolling back taxes (plus interest) for the past 3 to 5 tax years, so it is very important to reapply every 5 years.
Unemployment taxes in Texas
Unemployment taxes usually consist of three factors. They are the wage base, range of rates, number of schedules. Below is an outline of the three:
- Wage Base – Texas has a wage base of $9,000 for 2020
- UI Rates – range from 0.15% to 6.36%
- Schedules – Texas has one rate schedule regarding UI
Texas Business Entities – LLCs
As you’ve heard, Texas is a business-friendly state. It is one of only a few states that do not have an annual LLC fee. Here are some important facts:
- No annual LLC fee – Yay!
- When you register with the state, you pay a one time fee of $300
- Secretary of State of Texas website – click here