Running a business in Texas has long been attractive because of the state’s reputation for having no personal income tax. While that headline often draws entrepreneurs in, the reality is more layered when it comes to business taxes in Texas. From franchise tax obligations to sales tax compliance and property assessments, understanding the system is critical for both new and established businesses. In 2025, several changes in tax policy and economic conditions are shaping the way companies must approach their obligations.
In this blog, we’ve unpacked all the essential elements every business owner should know, so you can stay ahead of the complexities.
Why Taxes Matter More in 2025
Texas continues to be one of the fastest-growing economies in the United States, with around 3.5 million small businesses operating across the state, according to the U.S. Small Business Administration. Such growth means increased scrutiny from tax authorities and evolving rules that affect compliance.
While the state doesn’t impose a corporate income tax, it collects revenue from the franchise tax and sales tax system. For 2025, state agencies have also signaled stricter enforcement on tax penalties for Texas businesses that fail to file on time or miscalculate their obligations.
Types of Business Taxes in Texas
1- Franchise Tax
The franchise tax is basically a “privilege tax” imposed on businesses for operating in Texas. Unlike traditional income tax, it is based on the entity’s margin, which is calculated using one of several formulas (total revenue minus cost of goods sold, minus compensation, or 70% of total revenue).
In 2025, the tax rate in Texas for the franchise tax remains at:
- 0.375% for qualifying retailers and wholesalers.
- 0.75% for other businesses.
Companies with revenue below $2.47 million are exempt from paying, though they still need to file. This threshold has increased slightly from previous years, reflecting adjustments for inflation.
2- Sales and Use Tax
The sales tax rate in Texas stands at 6.25% at the state level. However, cities, counties, and special districts can add up to 2%, bringing the maximum combined rate to 8.25%. Businesses selling taxable goods or services must collect and remit this tax.
Failure to remit sales taxes is one of the most common reasons companies face audits and penalties. Knowing how to register for Texas state taxes is important for new entities to avoid early missteps. You can complete the registration process online through the Texas Comptroller’s office, where companies also handle periodic filings.
3- Property Tax Assessments
While Texas doesn’t levy a state property tax, businesses still contend with local business property tax assessments in Texas. This includes taxes on real estate, machinery, and even inventory in some jurisdictions. Assessments can vary widely depending on the county, making it important for businesses to track deadlines and verify the accuracy of their valuations.
Small Business Focus
For smaller enterprises, compliance can feel overwhelming. Small business tax rates in Texas are often more favorable thanks to the franchise tax threshold, yet many still get tripped up by sales and property tax rules.
The Texas Association of Business estimates that around 40% of small businesses that receive audit notices could have avoided them by keeping better records and understanding exemptions. For instance, certain service providers may not be subject to sales tax, but confusion arises due to varying interpretations at the local level.
Having clarity on what makes the IRS audit you at the federal level is equally important since mistakes on state filings can raise red flags across agencies.
Common Challenges Texas Businesses Face
1- Recordkeeping Issues
Missing receipts, inconsistent books, or outdated accounting software create gaps that auditors quickly exploit.
2- Misunderstanding Exemptions
Businesses often overlook available tax deductions for Texas businesses, such as costs for equipment or qualifying energy-efficient upgrades.
3- State vs. Local Variations
A major difficulty comes from balancing state vs. local taxes for businesses. Cities with special district taxes create unique filing demands.
4- Late Payments and Penalties
The Comptroller’s office can impose steep tax penalties for Texas businesses, sometimes reaching 10% or more of the unpaid balance plus interest.
Technology, Transparency, and Audits in 2025
As digital reporting systems expand, compliance gaps are easier to spot. The Comptroller’s office has invested heavily in technology to track discrepancies between reported sales and actual banking activity. This makes it harder for businesses to underreport income without triggering review.
Meanwhile, public information tools such as Texas company search give regulators and consumers alike easy access to business details, creating an additional layer of accountability.
When paired with the IRS, these systems can cross-reference filings, which raises questions for companies that appear inconsistent across state and federal platforms.
Practical Steps for Business Owners
1- Set Up Automated Systems
Use modern accounting software to streamline reporting, especially when managing multiple tax categories.
2- Review Property Assessments Annually
Businesses can file protests if they believe their valuation is inaccurate, potentially reducing their local tax bill.
3- Plan for Sales Tax Audits
Keep clear documentation of taxable vs. non-taxable sales. Knowing how to respond effectively to an IRS audit letter or state-level inquiry can make the difference between a smooth resolution and costly delays.
4- Get Professional Help
Consulting experts who specialize in IRS audit defense services and state compliance can reduce risks significantly. This is particularly helpful for companies that have operations in multiple jurisdictions.
The Evolving Landscape in 2025
Economic pressures, inflation, and population growth are pushing local governments to depend more heavily on business revenue. This means closer monitoring of compliance and less tolerance for errors. The question of how much business taxes are in Texas is no longer just about franchise tax rates; it now includes a web of sales, property, and local obligations that vary widely.
Business owners should also prepare for how long audits may take. While state-level reviews are often resolved in under six months, federal audits can stretch beyond a year. Understanding how long an IRS audit takes to resolve can help companies plan resources accordingly.
Why Expert Help Matters
Even the most diligent businesses can run into questions about what happens when you get audited or what steps to take after receiving notices. Having advisors who offer IRS audit defense representation and tailored IRS audit help for small businesses is no longer optional for many.
This is where tax planning becomes important. By addressing compliance proactively, business owners can not only reduce task risks but also position themselves for sustainable growth in Texas’s competitive market.
Final Thoughts
Business owners often underestimate the layers involved in business taxes in Texas. While the absence of a corporate income tax makes the state attractive, franchise taxes, sales taxes, and property assessments bring their own challenges. As we approach 2026, compliance is under sharper scrutiny than ever, and penalties for mistakes are steep.
For companies seeking stability, the best path forward lies in preparation: investing in accurate records, keeping track of filing deadlines, and seeking professional support where needed. Whether you are a small operation or a large entity, understanding the nuances of business taxes in Texas is a non-negotiable step in securing long-term success.