Texas is well known for having no state personal income tax, but the tax advantages for businesses go much further. Between sales tax exemptions, franchise tax provisions, property tax abatements, and federal credits available to Texas businesses, the total incentive landscape is substantial. This guide covers the major tax exemptions available to Texas businesses.
Sales and Use Tax Exemptions
Texas imposes a 6.25% state sales tax (plus up to 2% local tax), but several categories of business purchases are exempt.
Manufacturing Exemption
Machinery and equipment used directly in the manufacturing process are exempt from Texas sales and use tax. This includes production equipment, raw materials that become part of the finished product, and packaging materials. The exemption is one of the most valuable in the Texas tax code for manufacturing businesses.
Data Center Exemption
Qualifying data center operations can receive sales tax exemptions on equipment purchases, including servers, cooling systems, and power infrastructure. Businesses must meet minimum investment thresholds and job creation requirements to receive the exemption.
Agricultural Exemptions
Businesses engaged in agricultural production can obtain an agricultural sales tax exemption number from the Texas Comptroller. This exempts qualifying purchases of farm equipment, livestock feed, seeds, and other agricultural inputs from sales tax.
Research and Development Exemption
Tangible personal property used in qualified research activities may be exempt from sales tax under Texas law. The exemption covers equipment and supplies consumed in R&D activities that meet the Internal Revenue Code Section 41 definition of qualified research.
Franchise Tax Exemptions and Reductions
The Texas franchise tax applies to most businesses operating in Texas. However, several exemptions and reductions are available:
- No-tax-due threshold: Businesses with total revenue below the statutory threshold (currently $2.47 million) owe no franchise tax.
- EZ computation: Businesses with revenue up to $20 million can use a simplified computation that often results in lower tax liability.
- Cost of goods sold deduction: Businesses that sell products can use the cost of goods sold method, which can significantly reduce taxable margin.
- Compensation deduction: Service businesses can deduct employee compensation to reduce taxable margin.
- R&D credit: Businesses conducting qualified research activities in Texas can claim a credit against franchise tax liability.
See our detailed guide to Texas franchise tax credits.
Property Tax Abatements
While not technically an exemption, property tax abatements function similarly by reducing or eliminating property tax on new construction or improvements. Texas cities and counties can offer abatements under Chapter 312 of the Tax Code.
- Abatements typically last 5-10 years
- They apply to the increase in property value from new investment, not existing property value
- Most jurisdictions require minimum investment thresholds and job creation commitments
- Abatements are negotiated individually and are not automatic
Enterprise Zone Sales Tax Refunds
The Texas Enterprise Zone Program provides state sales and use tax refunds for businesses that create jobs in economically distressed areas. Cities and counties nominate eligible projects, and the state approves designations. Refunds can reach up to $2,500 per job created within the zone, with a maximum of $1.25 million over the designation period.
Freeport Exemption
The Freeport Exemption removes tangible personal property from property tax rolls if the property is temporarily stored in Texas and will be shipped out of state within 175 days. This is particularly valuable for businesses involved in distribution, warehousing, and logistics. Not all taxing jurisdictions have adopted the Freeport Exemption, so businesses should verify with their local appraisal district.
Federal Credits Available to Texas Businesses
Texas businesses also benefit from federal tax credits that reduce federal income tax liability:
- Federal R&D Tax Credit: Credits for qualified research expenditures under IRC Section 41.
- Work Opportunity Tax Credit: Credits for hiring from targeted groups including veterans and long-term unemployed.
- Investment Tax Credit and Production Tax Credit: Clean energy credits for solar, wind, and other qualifying energy investments.
- Opportunity Zone Incentives: Capital gains tax benefits for investments in designated Opportunity Zones across Texas.
Find Tax Exemptions That May Apply to Your Business
The combination of Texas state exemptions and federal credits creates a layered system that varies significantly by industry, location, and business activity. Our free screening report checks your business against 150+ verified programs — including tax exemptions, credits, grants, and incentives — and shows you which ones may match. Start your free screening →