Texas has long been recognized as one of the most business-friendly states in the U.S., attracting companies of all sizes with its low tax burden, pro-business policies, and robust economic growth. One of the key advantages of doing business in Texas is the variety of tax incentives designed to support startups, small businesses, and large corporations alike.
Understanding these incentives can help you reduce your tax liability, reinvest in your company, and ultimately fuel business growth. Whether you’re a new business looking to establish roots in the Lone Star State or an existing company exploring tax-saving opportunities, knowing what’s available can give you a competitive edge.
In this guide, we’ll explore key Texas tax incentives that could benefit your business, starting with franchise tax exemptions, sales tax breaks, and property tax incentives.
Franchise Tax Exemptions and Credits
No Corporate or Personal Income Tax
One of Texas’s biggest advantages is that it does not impose a corporate or personal income tax. Instead, the state levies a franchise tax on businesses, which is a percentage of gross receipts beyond a certain threshold. This means businesses in Texas can retain more of their profits compared to states with high corporate tax rates.
Franchise Tax Overview
The Texas franchise tax applies to businesses with annual revenue over a set threshold ($1.23 million as of 2024). Businesses below this revenue amount are exempt from paying franchise tax altogether.
Research and Development (R&D) Tax Credit
For businesses engaged in research and development, Texas offers an R&D tax credit that can reduce franchise tax liability. Companies that qualify for this credit can either:
- Deduct R&D expenses from their taxable revenue
- Receive a credit against their franchise tax based on qualifying R&D expenditures
Eligible businesses include those in technology, engineering, healthcare, and other innovation-driven industries.
Sales and Use Tax Exemptions
Texas businesses can take advantage of several sales and use tax exemptions, which can significantly lower operational costs.
Manufacturing Exemptions
Businesses involved in manufacturing may qualify for sales tax exemptions on machinery and equipment used in the production process. Eligible items include:
- Equipment used in the direct manufacturing of goods
- Components used in production
- Repair or replacement parts for manufacturing equipment
This exemption helps reduce overhead costs for manufacturers while encouraging investment in modern equipment.
Data Center Exemptions
Texas is becoming a hub for data centers, thanks in part to generous tax incentives. Qualifying data centers can receive a 100% sales tax exemption on:
- Computers and servers
- Cooling and power infrastructure
- Electricity and fuel used for data center operations
To qualify, a business must invest at least $200 million in a Texas data center and create at least 20 full-time jobs.
Property Tax Incentives
Texas property tax rates are relatively high, but the state offers programs to help businesses reduce their burden.
Texas Enterprise Zone Program (EZP)
The Texas Enterprise Zone Program provides tax refunds for businesses that invest in economically distressed areas. Benefits include:
- Sales and use tax refunds based on job creation and capital investment
- Refunds ranging from $2,500 to $7,500 per qualifying job created
- Priority status for state-funded infrastructure improvements in designated enterprise zones
Businesses must apply and demonstrate their economic impact to qualify for the program.
Chapter 313 Agreements (Texas Economic Development Act)
While Texas doesn’t offer traditional corporate income tax breaks, Chapter 313 agreements allow businesses to negotiate property tax limitations for large capital investments.
Key benefits include:
- Reduced property tax liability for up to 10 years
- Incentives for businesses investing in manufacturing, renewable energy, and other high-value industries
- Attracting major employers and infrastructure development in Texas
However, the Chapter 313 program is under review, and businesses should consult with state agencies to understand its current status and application process.
Make the most of Texas tax savings and fuel your company’s success
Grants and Financing Programs
While tax incentives help businesses reduce liabilities, Texas also offers grant programs and financing opportunities to support business growth, expansion, and relocation.
Texas Enterprise Fund (TEF)
The Texas Enterprise Fund (TEF) is one of the most competitive economic development programs in the state. It acts as a “deal-closing” fund to attract new businesses and encourage job creation.
To qualify, businesses must:
- Create at least 75 new jobs in urban areas or 25 in rural areas
- Offer wages above the average county pay
- Demonstrate a significant capital investment
Awards vary based on project size, with grants ranging from hundreds of thousands to millions of dollars. This fund has helped bring major companies to Texas, solidifying its reputation as a business-friendly state.
State of Texas Industrial Revenue Bond Program (IRB)
For businesses looking to finance new facilities or expand operations, the Industrial Revenue Bond (IRB) program provides long-term, low-interest loans.
- Bonds are issued to businesses involved in manufacturing, research, and development.
- Tax-exempt status allows for lower interest rates.
- Funds can be used for land purchases, facility construction, and equipment acquisition.
This program is especially beneficial for large-scale projects requiring significant capital investment.
Industry-Specific Incentives
In addition to general business incentives, Texas provides targeted tax credits and grants for specific industries, including renewable energy, historic preservation, and agriculture.
Renewable Energy Incentives
Texas is a leader in wind and solar energy, offering incentives to businesses in the renewable energy sector.
- Renewable Energy Property Tax Exemptions – Businesses installing solar or wind energy systems may receive 100% property tax exemptions on the added value.
- Texas Emissions Reduction Plan (TERP) – This program offers grants to companies that upgrade to cleaner technologies, such as fuel-efficient transportation fleets and emissions-reducing equipment.
These incentives encourage businesses to invest in sustainable practices while benefiting from cost reductions.
Historic Preservation Tax Credit
Businesses restoring historic buildings in Texas can benefit from the Texas Historic Preservation Tax Credit Program.
- Provides a 25% credit on eligible restoration costs.
- Applies to commercial properties listed as historic structures.
- Can be combined with federal historic tax credits for even greater savings.
This program is particularly valuable for businesses revitalizing historic downtown areas or repurposing older buildings into modern office spaces or retail locations.
Workforce Development Incentives
Texas invests in workforce development to ensure businesses have access to a skilled labor force.
Skills Development Fund
The Skills Development Fund provides grants to businesses partnering with community colleges and training centers to upskill employees.
- Covers customized workforce training programs.
- Grants range from $500 to $1,800 per trainee.
- Open to various industries, including healthcare, IT, and advanced manufacturing.
Employers looking to develop a highly skilled workforce can use this fund to train employees at a lower cost.
Work Opportunity Tax Credit (WOTC)
Businesses that hire individuals from specific target groups, such as veterans, ex-offenders, and long-term unemployed individuals, may qualify for the Work Opportunity Tax Credit (WOTC).
- Offers up to $9,600 in tax credits per eligible new hire.
- Encourages diversity and inclusion in hiring practices.
- Reduces recruitment costs by incentivizing long-term employment.
Conclusion
Taking full advantage of Texas’s tax incentives can provide businesses with significant cost savings and long-term financial benefits. From franchise tax exemptions and property tax reductions to industry-specific grants and workforce training programs, these opportunities help companies reinvest in growth, hire more employees, and strengthen operations.
Navigating these incentives, however, can be complex, especially for small businesses focused on daily operations. The HR Ally serves as a strategic HR and payroll partner for small businesses in Houston, offering tailored solutions that simplify tax compliance, payroll management, and workforce administration. With a team dedicated to keeping businesses compliant and efficient, The HR Ally helps business owners save time, reduce risks, and focus on scaling operations.
For expert guidance in payroll, HR compliance, and business tax matters, connect with The HR Ally today.