For entrepreneurs and small business owners, managing taxes can feel overwhelming. Yet, with the right tax planning strategies for small businesses, Texas offers unique opportunities to minimize tax burdens while maximizing profitability. From understanding state-specific laws to leveraging deductions and credits, smart planning can save your business thousands of dollars each year.
Why Texas is a Unique Tax Environment
Unlike many states, Texas does not impose a personal or corporate income tax. This makes the Lone Star State particularly attractive to entrepreneurs. However, businesses still face obligations such as the Texas franchise tax and federal taxes. Understanding how these taxes work is essential for crafting a strategy that minimizes liability.
- No personal or corporate income tax: Business owners retain more of their profits.
- Franchise tax: A margin tax that applies to most entities doing business in Texas.
- Sales tax: Currently set at 6.25% statewide, with local jurisdictions adding up to 2% more.
While these obligations may seem straightforward, there are many strategies to minimize what you pay.
Understanding the Texas Franchise Tax
The franchise tax is the main statewide business tax in Texas. It is calculated based on a business’s “margin,” which can be determined in different ways:
- Total revenue minus cost of goods sold (COGS)
- Total revenue minus compensation
- Total revenue times 70%
The lowest resulting figure is used to determine tax liability. Businesses with annual revenue under a certain threshold (currently $2.47 million in 2024) are exempt from paying franchise tax but must still file a “no tax due” report.
Strategies to Minimize Franchise Tax:
- Properly classify expenses as COGS where possible.
- Consider shifting compensation into deductible categories.
- Regularly review revenue to ensure compliance with thresholds.
Professional tax advisors can help determine the most advantageous calculation for your specific situation.
Federal Tax Obligations for Texas Businesses
Even though Texas has no state income tax, businesses are still subject to federal income taxes. Small businesses may file as sole proprietorships, partnerships, LLCs, or corporations, each with different implications for taxation.
- Sole proprietorships and partnerships: Report income on personal returns.
- LLCs: Can elect to be taxed as partnerships or corporations.
- C corporations: Subject to the 21% federal corporate tax rate.
- S corporations: Allow income to “pass through” to shareholders’ personal returns.
Understanding how your entity is taxed at the federal level is critical in minimizing total tax liability.
Deductions Every Texas Business Should Consider
One of the most effective ways to lower taxes is by maximizing deductions. Common deductions include:
- Home office expenses: If part of your home is used exclusively for business.
- Vehicle expenses: Mileage or actual costs if the vehicle is used for business.
- Equipment and software: Computers, software, and tools are often deductible under Section 179.
- Employee benefits: Health insurance and retirement plan contributions can be deductible.
- Professional services: Fees paid to lawyers, accountants, and consultants.
Keeping detailed records is vital. Many businesses lose money each year simply because they fail to claim all eligible deductions.
Leveraging Tax Credits
Unlike deductions, which reduce taxable income, tax credits directly reduce your tax bill. Some key credits include:
- Research and development (R&D) tax credit: Available for businesses investing in innovation.
- Work Opportunity Tax Credit (WOTC): For hiring individuals from certain target groups.
- Energy-efficient credits: For investing in renewable energy or energy-saving improvements.
Working with a professional ensures you identify and apply for all applicable credits.
Entity Structure and Its Impact on Taxes
The type of entity you choose for your business significantly impacts your tax obligations.
- Sole Proprietorship – Simplest structure, but owners are taxed on all profits.
- Partnership – Pass-through taxation, with liability divided among partners.
- LLC – Flexible, can choose to be taxed as a partnership, S corporation, or C corporation.
- C Corporation – Subject to federal corporate tax, but allows retained earnings.
- S Corporation – Pass-through taxation, but allows savings on self-employment taxes.
Strategically restructuring your business could reduce your tax liability while providing other benefits like liability protection.
Sales Tax Considerations in Texas
Texas imposes a state sales tax of 6.25%, with local jurisdictions able to add up to 2%. This applies to most goods and some services.
Tips to Manage Sales Tax:
- Confirm whether your business is required to collect sales tax.
- Ensure proper systems are in place to calculate and remit taxes.
- Take advantage of exemptions, such as manufacturing or resale exemptions.
- File returns on time to avoid penalties.
Incorrect handling of sales tax can quickly lead to audits and penalties.
Tax Planning Throughout the Year
Effective tax planning is not something you do once a year in April. It requires an ongoing strategy.
- Quarterly estimated taxes: Avoid penalties by making timely estimated payments.
- Cash flow management: Align large expenses with tax deadlines to maximize deductions.
- Retirement planning: Contributions to SEP IRAs, SIMPLE IRAs, or 401(k)s can reduce taxable income.
- Charitable contributions: Donations made through the business can be deducted.
Regular check-ins with a tax advisor ensure you’re not missing opportunities.
Recordkeeping: The Foundation of Tax Savings
Accurate and detailed recordkeeping is essential to successfully minimizing taxes. Poor documentation can lead to missed deductions, disallowed expenses, or audits.
Best practices include:
- Maintaining separate accounts for business and personal expenses.
- Using accounting software to track income and expenses.
- Saving receipts and categorizing them appropriately.
- Reconciling bank accounts monthly.
A clean paper trail protects your business and supports every deduction you claim.
Avoiding Common Tax Mistakes in Texas
Many businesses in Texas make costly tax errors, including:
- Failing to file franchise tax reports even when no tax is due.
- Misclassifying employees as independent contractors.
- Not collecting or remitting sales tax properly.
- Overlooking deductions like depreciation or home office expenses.
- Missing deadlines for estimated tax payments.
These mistakes can lead to penalties, audits, and higher liabilities. Prevention through proper planning is always cheaper than correction.
When to Seek Professional Help
While many small business owners attempt to manage taxes independently, the complexities of Texas and federal tax laws often require professional expertise. A qualified tax advisor can:
- Identify hidden deductions and credits.
- Help choose the most tax-efficient business structure.
- Ensure compliance with all filing requirements.
- Provide audit support if needed.
- Create long-term strategies to reduce liabilities year after year.
The investment in expert guidance usually pays for itself many times over in tax savings.
The Role of Strategic Tax Planning in Business Growth
Minimizing taxes isn’t just about reducing what you owe—it’s about freeing up capital to reinvest in your business. Smart tax planning allows businesses to:
- Expand operations.
- Hire new employees.
- Invest in technology or infrastructure.
- Increase profitability and competitiveness.
By taking a proactive approach, taxes become not just a necessary obligation but a tool for growth.
Partner with Lien Phat & Co Tax Advisory
At Lien Phat & Co Tax Advisory, our business is helping your business succeed. Whether you need help with business planning, back-office support, or higher-level executive strategies, we provide the tools and expertise you need to thrive.
Founded by Patrick Huynh in 2001, we have over 22 years of experience guiding entrepreneurs through complex tax landscapes. Our focus is on identifying opportunities for productivity, efficiency, and profitability—while ensuring you minimize your tax liability in Texas.
If you’re ready to maximize your tax savings and unlock new growth opportunities, let’s talk.