Texas is one of only nine states with no personal income tax, and it has no corporate income tax. But that does not mean tax incentives are irrelevant to Texas businesses. Between the Texas franchise tax system, property tax abatements, sales tax exemptions, and the full range of federal tax credits, Texas businesses have access to dozens of tax reduction programs that can save thousands to millions of dollars annually.
This guide covers every major tax incentive available to Texas businesses in 2026, explains how each one works, and shows you how to determine if your business qualifies.
The Texas Tax Landscape
Understanding what taxes Texas does and does not collect is essential for identifying which incentives matter to your business:
| Tax Type | Texas Status | Key Incentive Opportunities |
|---|---|---|
| Personal income tax | None | N/A (no tax to credit against) |
| Corporate income tax | None (franchise tax instead) | Franchise tax credits, no-tax-due thresholds |
| Franchise (margin) tax | Yes (0.375% - 0.75%) | Research credits, solar credits, exemptions |
| Property tax | Yes (local, among highest in US) | Abatements, Freeport exemption, TIRZ |
| Sales tax | Yes (6.25% state + up to 2% local) | Manufacturing exemption, data center exemption |
| Federal income tax | Yes | R&D credit, WOTC, Historic credit, 179D, bonus depreciation |
The biggest tax incentive opportunities for most Texas businesses are property tax abatements (because Texas property taxes are high), federal income tax credits (because they reduce federal liability dollar-for-dollar), and sales tax exemptions (because they apply to ongoing purchases).
Texas Franchise Tax Credits
The Texas franchise tax (also called the margin tax) applies to most businesses operating in Texas with revenue above $2.47 million (2026 threshold). The tax rate is 0.75% for most businesses and 0.375% for qualifying retail and wholesale businesses. Several credits can reduce or eliminate franchise tax liability.
Research and Development Credit
Texas offers a franchise tax credit for qualified research expenses that mirrors the federal R&D tax credit. The credit equals a percentage of qualified research expenses incurred in Texas.
- Credit rate depends on the ratio of current to base-period expenses
- Covers wages, supplies, and contract research in Texas
- Can be carried forward for up to 20 years
- Especially valuable for tech, manufacturing, and engineering companies
Solar Energy Device Credit
Businesses that install solar energy devices on their property can claim a franchise tax credit. This incentive supports Texas's growing renewable energy sector.
No-Tax-Due Threshold
Businesses with total revenue at or below $2.47 million (2026) owe no franchise tax. This threshold effectively exempts most small businesses from the franchise tax entirely. This is not a credit but an exemption that eliminates the obligation.
Complete franchise tax credit guide | Franchise tax vs income tax
Property Tax Abatements
Texas has some of the highest property tax rates in the country, which makes property tax abatements one of the most valuable incentive categories for Texas businesses. Cities, counties, and special districts can offer abatements of up to 100% for up to 10 years.
How Property Tax Abatements Work
Texas Tax Code Chapter 312 authorizes cities and counties to designate reinvestment zones and offer tax abatement agreements to qualifying businesses. The abatement applies to the increase in property value resulting from new investment — existing property taxes are not reduced.
Key Features
| Feature | Detail |
|---|---|
| Maximum abatement | Up to 100% of new taxable value |
| Maximum term | 10 years |
| Eligible investments | New construction, renovation, machinery, equipment in reinvestment zones |
| Required | Property must be in a designated reinvestment zone; performance agreement required |
| Typical requirements | Minimum investment, job creation, wage levels, completion timelines |
Who Benefits Most
- Manufacturers building or expanding production facilities
- Distributors and logistics companies building warehouses
- Data center operators (heavy capital investment)
- Companies relocating or expanding headquarters
- Hotel and hospitality developers
Complete property tax abatement guide | Chapter 312 vs 380 comparison | What is a property tax abatement?
Sales Tax Exemptions
Texas sales tax exemptions reduce or eliminate sales tax on qualifying purchases. These are particularly valuable for manufacturing and industrial businesses that make large equipment and material purchases.
Manufacturing Exemption
Machinery, equipment, and supplies used directly in manufacturing, processing, fabricating, or repairing tangible personal property for sale are exempt from Texas sales tax. This is one of the most valuable exemptions for industrial businesses — it applies to equipment purchases, parts, and supplies used in the production process.
Data Center Exemption
Qualifying data centers can receive sales tax exemptions on equipment, electricity, and cooling infrastructure. Requirements include minimum investment thresholds, job creation, and location within a designated area.
Other Sales Tax Exemptions
- Agricultural exemption: Equipment, feed, seed, and supplies used in agricultural production
- Research and development: Tangible personal property used in qualifying R&D activities
- Pollution control: Equipment used exclusively for pollution control
- Internet hosting: Equipment used to provide Internet hosting services
Complete sales tax exemption guide | Manufacturing tax exemptions | All exemption types
Enterprise Zone Programs
The Texas Enterprise Zone Program provides state sales and use tax refunds to businesses that invest and create jobs in economically distressed areas. This is a refund program (not an exemption) — the business pays sales tax on qualified purchases and then applies for a refund.
Key Benefits
- State sales and use tax refunds on qualified expenditures
- Refund amount depends on jobs created and capital invested
- Maximum refund per job created per project period
- Requires designation by a local governing body
Qualification Requirements
Businesses must be located in or relocating to an enterprise zone (an economically distressed area). The local governing body must nominate the business, and the state must approve the designation. Minimum job creation and capital investment requirements apply.
Complete enterprise zone guide | For retail | For restaurants | What is an enterprise zone?
Freeport Exemption
The Freeport Exemption exempts from property tax certain goods that are brought into Texas and then shipped out of state within 175 days. This is a significant benefit for distributors, manufacturers, and logistics companies that move inventory through Texas.
How It Works
- Applies to inventory, goods in process, and raw materials that are temporarily in Texas
- Goods must leave Texas within 175 days
- Local taxing jurisdictions must opt in (most have)
- Claimed annually on property tax rendition with supporting documentation
What is the Freeport Exemption? | For distributors | For manufacturers
Tax Increment Reinvestment Zones (TIRZ)
TIRZ (also called Tax Increment Financing or TIF) captures the increase in property tax revenue from new development and reinvests it in infrastructure and improvements within the zone. While TIRZ primarily benefits the zone as a whole, businesses in TIRZ zones can benefit from improved infrastructure, reduced development costs, and coordinated incentive packages.
Key Features
- Property tax revenue from increased property values stays in the zone
- Funds infrastructure improvements that benefit zone businesses
- Can be combined with Chapter 380 agreements and tax abatements
- Major Texas cities operate dozens of TIRZ zones
Federal Tax Credits Available in Texas
Because Texas has no state income tax, federal income tax credits are the primary way to reduce your income tax liability. These credits are available nationwide but are particularly impactful in Texas where they represent the main tax-reduction mechanism beyond the franchise tax.
Research and Development (R&D) Tax Credit
The federal R&D tax credit provides a credit of approximately 6-8% of qualified research expenses. "Research" is defined broadly — it includes developing or improving products, processes, software, and formulations. Many businesses are surprised to learn they qualify.
| Feature | Detail |
|---|---|
| Credit rate | ~6-8% of qualifying expenses (regular or ASC method) |
| Qualifying expenses | Wages, supplies, contract research (65%) |
| Carryforward | 20 years |
| Startup benefit | Up to $500K/year can offset payroll tax |
R&D credit for software companies | R&D credit for manufacturers | R&D grants in Texas
Work Opportunity Tax Credit (WOTC)
WOTC provides a tax credit for hiring employees from targeted groups including veterans, ex-felons, SNAP recipients, long-term unemployed, and others. Credits range from $2,400 to $9,600 per qualified new hire.
Full WOTC guide | WOTC for restaurants | WOTC for construction
Historic Tax Credit
A 20% federal tax credit for qualified rehabilitation expenses on certified historic structures. Texas has many eligible historic buildings, particularly in older city centers. The credit is claimed over 5 years.
Historic tax credit for Texas developers
Section 179D Energy-Efficient Commercial Buildings
Building owners and designers who install energy-efficient systems in commercial buildings can claim a deduction of up to $5 per square foot. Qualifying systems include HVAC, lighting, and building envelope improvements.
179D for architects | 179D for engineers
Other Federal Credits
- Bonus depreciation: 60% first-year depreciation in 2026 (phasing down from 100%)
- Section 179 expensing: Up to $1,220,000 in equipment can be expensed in the year of purchase (2026)
- Investment Tax Credit (ITC): 30% credit for solar energy systems
- EV charging credit: Credits for installing electric vehicle charging stations
- Low-Income Housing Tax Credit (LIHTC): For affordable housing development. 4% vs 9% comparison
Complete list of Texas tax credit programs | Year-end tax planning
Stacking Multiple Incentives
One of the most effective strategies for Texas businesses is stacking multiple incentive programs. Because Texas offers incentives at the state, local, and federal level across different tax types, many programs can be combined for maximum benefit.
Common Stacking Combinations
| Business Type | Programs to Stack |
|---|---|
| Manufacturer | Property tax abatement + sales tax manufacturing exemption + Freeport exemption + R&D credit + WOTC + Skills Development Fund |
| Tech company | R&D credit (federal + state) + WOTC + SBIR grants + data center exemption |
| Hotel/hospitality | Chapter 380 agreement + property tax abatement + TIRZ benefits + enterprise zone refund + WOTC |
| Rural business | USDA REAP + property tax abatement + enterprise zone + WOTC + HUBZone benefits |
Complete guide to stacking Texas incentives | Maximizing tax savings
How to Claim Texas Tax Incentives
Franchise Tax Credits
Franchise tax credits are claimed on your Texas Franchise Tax Report (Form 05-158-A or 05-169). Maintain documentation of qualifying expenses and file within the normal franchise tax deadline.
Property Tax Abatements
- Contact your city or county economic development office
- Determine if your property is in a reinvestment zone
- Negotiate an abatement agreement with the taxing jurisdiction
- Meet performance requirements (investment, jobs, timeline)
- File annual compliance reports
Sales Tax Exemptions
- Determine which exemption applies to your purchases
- Obtain an exemption certificate from the Texas Comptroller
- Present the certificate to your vendor at the time of purchase
- Maintain records supporting the exempt use
Federal Tax Credits
Federal tax credits are claimed on your federal income tax return using the appropriate IRS forms. R&D credits use Form 6765. WOTC requires pre-certification (Form 8850) and is claimed on Form 5884. Work with a tax professional experienced in these specific credits.
What tax credits are available for Texas employers? | Oil and gas tax incentives
Frequently Asked Questions
Does Texas have an income tax?
No. Texas has no personal income tax and no corporate income tax. The Texas franchise (margin) tax is a gross receipts-style tax, not an income tax. Federal income tax still applies to all Texas businesses.
What is the Texas franchise tax?
The franchise tax is a tax on business margin (revenue minus cost of goods sold, compensation, or a 30% standard deduction). The rate is 0.75% for most businesses and 0.375% for qualifying retailers and wholesalers. Businesses below $2.47 million in revenue owe nothing. Learn more
Can small businesses benefit from property tax abatements?
Most property tax abatement programs target larger investments ($1 million+), but some cities have programs for smaller investments in targeted areas. Chapter 380 agreements at the city level often have more flexibility for smaller businesses.
How much can the R&D tax credit save my business?
The federal R&D credit is approximately 6-8% of qualifying expenses. A company spending $500,000 on qualifying R&D might save $30,000- $40,000 in federal taxes. The Texas franchise tax R&D credit provides additional savings on the state side.
Can I claim both state and federal tax credits?
Yes. State and federal credits apply to different taxes. You can claim a Texas franchise tax R&D credit and a federal R&D credit based on the same qualifying expenses (though adjustments may be required). Property tax abatements and federal credits can always be combined.
Who should I work with to claim tax incentives?
For R&D credits and federal credits, work with a CPA or tax advisor who specializes in these specific credits. For property tax abatements and local incentives, contact your city's economic development office directly or work with a tax incentive consultant.
Next Steps
Tax incentives are just one part of the Texas business program landscape. Start your free screening to match your business against 150+ verified programs, or explore our other guides: