Guide To Houston Small Business Tax Exemption
Guide To Houston Small Business Tax Relief
Guide To Houston Small Business Taxes
Guide To Houston Small Business Tax Credit

Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business’s legal form. In most states corporations are subject to a corporate income tax, while income from pass-through entities such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state’s tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. Personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.

Currently, six states – Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming – do not have a corporate income tax. However, four of those states – Nevada, Ohio, Texas, and Washington – do have some form of gross receipts tax on corporations. Moreover, five of those states – Nevada, South Dakota, Texas, Washington, and Wyoming – as well as Alaska and Florida currently have no personal income tax. Individuals in New Hampshire and Tennessee are only taxed on interest and dividend income.

The Small Business Administration is providing information on government assistance programs for small businesses. This is to ensure small businesses have access to information on loans, paycheck protection, guidance and local assistance. Small businesses are encouraged to do their part to keep their employees, customers, and themselves healthy.
Many small business owners use a sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their personal income tax return. If you run the business as an LLC and you are the sole owner, the IRS also allows you to use the Schedule C attachment.

Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a franchise tax or privilege tax. This is frequently justified as a tax simply for the privilege of doing business in the state. As with state taxes on business income, the specifics of a state’s franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business’s net worth.

Texas has a franchise tax that applies to most Texas businesses other than sole proprietorships and certain general partnerships (those where all partners are natural persons as opposed to, e.g., businesses). At the same time, Texas has no personal income tax. Thus, while your Texas business itself may be subject to the franchise tax, any remaining income after these taxes that passes through to you personally, for example from an S corporation, LLC, or limited liability partnership (LLP), will not be subject to further taxation on your personal state tax return.

The Texas franchise tax rate for most businesses is .75% of the taxable margin. However, for qualifying wholesalers and retailers (meaning, generally, businesses primarily engaged in wholesale or retail trade), the rate is 0.375%. Also, for businesses with $20 million or less in total revenue that elect to use the so-called E-Z Computation, the rate is 0.331%. (E-Z Computation is not covered here.)

When it comes to managing your finances, make sure you are as thorough and accurate as possible with the help of PADGETT BUSINESS SERVICES®. We are a small business tax service in Houston that is dedicated to helping your business succeed. Backed by a name with over 50 years of experience, we’ll be the business partner you deserve.

The taxable margin, on which the franchise tax is based, is equal to the least of the following four amounts:

70% of total revenue
100% of total revenue minus cost of goods sold (COGS)
100% of total revenue minus compensation; or
total revenue minus $1 million.

There is no minimum franchise tax. Moreover, if your business’s total tax due is less $1,000 or your business’s annualized total revenue is less than or equal to the no-tax-due threshold ($1,130,000 in 2018 and 2019; adjusted every two years), then you do not owe any franchise tax. Franchise tax returns are due each year on May 15th.

Note that various possible state credits and discounts that may apply to your particular business are not covered here.

Guide To Houston Small Business Tax Exemption

Let’s briefly look at additional details for five of the most common forms of Texas business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations. Texas corporations are subject to the franchise tax.

Example: Your Texas corporation had annualized total revenue of $500,000. Because this amount is less than the no-tax-due threshold ($1,130,000 in 2018 and 2019; adjusted every two years), your corporation will owe no franchise tax.

S Corporations. An S corporation is created by first forming a traditional corporation, and then filing a special form with the IRS to elect S status. Unlike a traditional corporation, an S corporation is not subject to separate federal income tax. Furthermore, most states also do not subject S corporations to a separate income tax, and instead tax each individual shareholder on the portion of the corporation’s annual net income he or she receives. In other words, in most states, S corporations are pass-through entities. While Texas does recognize the federal S election, S corporations are nevertheless subject to the state’s franchise tax. An individual shareholder, however, does not owe state tax on whatever portion of the corporation’s net income he or she ultimately receives.

Example: Your S corporation had annualized total revenue of $500,000. Because this amount is less than no-tax-due threshold ($1,130,000 in 2018 and 2019; adjusted every two years), your corporation will owe no franchise tax. Moreover, individual shareholders will not owe tax to the state on their respective portions of the corporation’s net income.

Limited Liability Companies (LLCs). In most states, standard LLCs are pass-through entities that are not required to pay either federal or state income tax. Instead, income from the business is distributed to individual LLC members, who then pay federal and state taxes on the amount distributed to them. In Texas, however, LLCs are subject to the franchise tax. An individual member does not owe state tax on whatever portion of the company’s net income he or she ultimately receives.

(Note that, while by default LLCs are classified for federal tax purposes as either partnerships or disregarded entities, it is possible to elect to have your LLC classified as a corporation. In that case, the LLC would be subject to federal corporate income tax. However, this change in classification would not affect the LLC’s franchise tax obligations.)

Example: Your multi-member LLC, which has the default tax classification of partnership, had annualized total revenue of $500,000. Because this amount is less than the no-tax due threshold ($1,130,000 in 2018 and 2019; adjusted every two years), your LLC will owe no franchise tax. Moreover, individual LLC members will not owe tax to the state on their respective portions of the company’s net income.

Partnerships. There are various types of partnerships, such as general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs), among others. In Texas, most partnerships are subject to the franchise tax. Generally speaking, the only exception is a general partnership directly and solely owned by natural persons. Regardless of the type of partnership, individual partners personally owe no state tax on partnership income distributed to them.

Example: Your limited liability partnership had annualized total revenue of $500,000. Because this amount is less than no-tax due threshold ($1,130,000 in 2018 and 2019; adjusted every two years), your partnership will owe n