Texas has emerged as one of the most attractive destinations for startups in the United States, and the state’s tax structure forms the foundation of this competitive advantage. By eliminating personal and corporate income taxes while offering robust incentive programs, Texas provides entrepreneurs with substantially lower operating costs and more capital to reinvest in growth. This combination has prompted over 100 corporate relocations to Dallas alone since 2018, with 40% of these moving from California.
The Foundation: No State Income Tax
The most significant tax advantage Texas offers is its complete absence of state income tax on both individuals and businesses. This fundamental difference sets Texas apart from nearly all other states with developed startup ecosystems. While Delaware markets itself to startups as a corporate-friendly state, Delaware still imposes state income tax on corporate earnings, whereas Texas has eliminated this burden entirely.
For a startup founder and their employees, this means immediate, tangible savings. Consider a software company with ten employees earning an average of $80,000 annually. In a high-tax state like California (with a 13.3% top tax rate) or New York, the collective income tax liability would be substantial. In Texas, that same payroll generates zero state income tax, freeing approximately $64,000 annually that can be redirected toward product development, marketing, or additional hiring.
This advantage extends beyond salaries. Any profits the startup generates remain subject to no state income tax, allowing founders to reinvest more capital into expansion rather than losing it to state coffers. The cumulative impact over a startup’s first five years can represent hundreds of thousands of dollars in preserved capital—often the difference between scaling successfully and burning through runway.
The Franchise Tax: A Minimal Burden for Growth-Stage Companies
While Texas has no income tax, the state does impose a franchise tax on certain business entities. However, this tax is structured in a way that minimizes impact on early-stage startups. As of 2025, any business with total revenues below $2.47 million owes no franchise tax at all. For a startup in its first three to five years, this threshold provides substantial relief.
Once a company exceeds this threshold, the franchise tax rates remain competitive:
- 0.75% for most business types
- 0.375% for retail and wholesale businesses
- 0.331% for companies using the simplified “EZ Computation” method (available for businesses with $20 million or less in annual revenue)
To put this in perspective, a software company generating $10 million in annual revenue would pay approximately $75,000 in franchise tax at the 0.75% rate. While not insignificant, this represents a far lower effective tax rate than income taxes in other states. Additionally, veteran-owned businesses receive complete franchise tax exemptions for their first five years of operation, recognizing the value of military-connected entrepreneurs.
Research and Development Tax Credits: Significant Cash Returns
For startups engaged in technology development, biotech, advanced manufacturing, or other innovation-intensive sectors, federal and state R&D tax credits provide substantial financial relief. The federal R&D Tax Credit allows eligible startups to save up to $500,000 annually on payroll taxes through mechanisms like the Inflation Reduction Act. In Texas, this advantage is amplified—Austin-based startups can leverage up to $1.25 million in federal R&D credits when properly documented.
Recognizing the importance of innovation, Texas enacted a new R&D credit on June 22, 2025, that replaces the previous R&D franchise tax credit structure, providing startups with enhanced flexibility in how they claim these benefits.
Beyond federal credits, Texas provides sales tax exemptions on R&D equipment, materials, and prototypes used in the development process. For a biotech or hardware startup investing millions in laboratory equipment or manufacturing prototypes, these exemptions can represent $50,000 to $100,000+ in annual savings. Startups working with experienced CPAs can ensure they’re capturing all available R&D benefits, with unused credits carrying forward for up to 20 years.
Property Tax Incentives: Reducing Fixed Costs
Property taxes represent a substantial ongoing expense for businesses with physical locations or equipment-intensive operations. Texas addresses this through multiple property tax incentive programs that meaningfully reduce this burden.
Property Tax Abatements allow qualifying businesses to receive up to ten years of reduced property taxes, with the Texas Jobs and Security Act reducing property valuation by up to 50% or 25% in designated Opportunity Zones. For a manufacturing startup leasing a facility valued at $2 million, a 25% abatement represents $50,000+ in annual savings across ten years.
More recently, Texas voters approved House Bill 9, effective January 1, 2026, which dramatically increased the business personal property exemption from just $2,500 to $125,000. This exemption covers tangible assets like office furniture, machinery, equipment, and inventory used to generate income. For startups with equipment-intensive operations—from hardware manufacturers to equipment-as-a-service businesses—this change is transformative. A startup with $100,000 in equipment that previously paid property taxes on $97,500 in value will now pay taxes only on $0, effectively eliminating their equipment-related property tax liability.
This single reform is projected to save small business owners an average of $2,500 annually, and for many startups below the $125,000 threshold, it completely eliminates their business property tax burden.
Job Creation Incentives: Reducing Hiring Costs
Scaling a startup requires hiring talented employees, and Texas provides multiple tax credits to offset these hiring expenses. The Work Opportunity Tax Credit (WOTC) allows businesses to claim tax credits of up to $9,600 per employee hired from designated target groups including veterans, individuals receiving SNAP benefits, formerly incarcerated individuals, and long-term unemployment recipients. While the program currently ends December 31, 2025, startups can claim these credits for qualifying hires made before that date.
For early-stage startups planning significant hiring, the Texas Enterprise Fund provides performance-based grants that can be substantial. These “deal-closing” grants apply primarily to larger projects with 75+ jobs in urban areas or 25+ jobs in rural areas, but awards typically range from $1,000 to $10,000 per qualified job. For startups meeting these criteria—particularly those in technology, energy, or manufacturing—the TEF represents significant capital that effectively subsidizes payroll expenses.
Workforce Development Grants: Building Your Team
Beyond tax credits, the Skills Development Fund provides grants that help startups train new employees or upskill existing workers. The program allocates approximately $2,000 per employee trained, with single-project grants capped at $500,000 and typically structured as 12-month grants. A startup hiring 20 employees could potentially access $40,000 in training grants by partnering with a community or technical college.
This program is particularly valuable because it addresses a startup bottleneck—the gap between hiring talented people and getting them productive quickly. By subsidizing training costs, Texas effectively reduces the true cost of hiring specialized talent.
Energy and Green Technology Credits: For Sustainable Businesses
Startups in renewable energy, clean technology, or energy efficiency sectors benefit from additional incentives. The Business Energy Tax Investment Credit provides significant tax breaks for investments in solar panels, fuel cells, geothermal systems, and other renewable technologies. For a green tech startup installing these systems as part of their business operations, the credits can substantially reduce capital investment costs.
Notably, solar manufacturers enjoy a complete exemption from Texas franchise tax with no ceiling on the exemption amount—a substantial incentive for hardware-focused renewable energy startups.
Semiconductor and Advanced Technology Innovation Fund
For startups in semiconductor design, advanced packaging, or quantum computing, the Texas Semiconductor Innovation Fund represents an opportunity for substantial grants. The $698 million fund provides grants to businesses with established Texas presence engaged in semiconductor manufacturing and design. While geared toward larger projects, early-stage semiconductor startups with significant IP and growth potential should monitor this program.
The Ecosystem Advantage: More Than Just Taxes
Texas’s tax benefits don’t exist in isolation—they’re paired with a vibrant startup ecosystem. Austin alone attracted over $4.9 billion in venture capital in 2023, with 100,000+ tech workers and 50+ coworking spaces supporting startup growth. Dallas and Houston provide additional hubs with growing venture capital access and talent pools.
The combination of tax advantages and ecosystem infrastructure creates a multiplier effect. Lower taxes and reduced operating costs mean startups can extend their runway, hire faster, and reach product-market fit with less dilution to founders. Combined with access to capital, mentorship through accelerators like Techstars Austin (providing $120,000 in funding) and Capital Factory, and a growing concentration of successful tech entrepreneurs, Texas startups begin with material advantages over competitors in higher-tax states.
Comparing Texas to Alternatives
Texas vs. California: A California startup faces 13.3% state income tax on personal income plus 8.84% corporate income tax on profits. A Texas startup of identical scale and profitability pays zero state income tax on personal earnings and zero corporate income tax on profits. Over a seven-year runway to series funding, this difference can represent millions in preserved capital. It’s no wonder 139 California companies have relocated to Texas since 2020, with 40% of all company headquarters moves to Texas coming from California.
Texas vs. Delaware: While Delaware remains popular for venture-backed startups due to its mature corporate law and investor familiarity, it still imposes state income tax on corporate earnings. Texas offers lower real estate costs, lower labor expenses, and stronger state incentive programs—advantages that matter tremendously for bootstrapped or angel-funded startups that cannot access institutional venture capital. For VC-backed startups where legal sophistication is paramount, Delaware may remain preferable, but the gap is narrowing.
Texas vs. Ohio, North Carolina, and Other States: Texas combines zero income tax with lower operating costs, creating an advantage difficult for other business-friendly states to match. While states like North Carolina offer favorable corporate tax rates (2.5%), they still maintain state income taxation.
Strategic Planning: Maximizing Texas Tax Benefits
To fully capitalize on Texas tax benefits, startups should:
Understand the franchise tax structure: Companies below $2.47 million in revenue pay zero franchise tax. Once exceeding this threshold, the EZ Computation method (0.331% on earnings) typically saves more than standard calculations.
Document R&D activities meticulously: Capturing federal R&D tax credits requires detailed documentation. Working with a CPA experienced in R&D credits early in the business ensures you maximize available savings, especially given the recent legislative expansion of Texas’s R&D credit.
Plan hiring timing strategically: WOTC credits are available through December 31, 2025. Startups planning significant hiring should coordinate timing to capture these $9,600-per-employee credits before expiration.
Leverage property tax exemptions for equipment: With the January 2026 increase of business personal property exemptions to $125,000, startups with significant equipment should file appropriate renditions with their county appraisal districts to capture these savings.
Explore workforce training programs: Startups planning skilled hiring should connect with local workforce boards about Skills Development Fund opportunities, potentially accessing $2,000 per trained employee.
The Verdict: A Material Competitive Advantage
Texas’s tax structure provides startups with a measurable, quantifiable competitive advantage that extends far beyond simple math. By eliminating income taxes, maintaining minimal franchise taxes for early-stage companies, and offering targeted incentive programs for R&D, hiring, and equipment investment, Texas allows founders to focus capital and time on building great products rather than optimizing tax liability.
For bootstrapped startups, this advantage is material—often representing the difference between success and runway depletion. For venture-backed startups, it means extended runway before dilutive financing rounds, faster paths to profitability, and more capital available for market expansion. Combined with a growing ecosystem of talent, capital, and entrepreneurial infrastructure, Texas’s tax benefits provide a genuine structural advantage that explains why the state has become the second-largest hub for venture capital investment in the United States, trailing only California.
Entrepreneurs evaluating where to build their startup should place Texas high on their list, not merely for tax savings, but because the state’s financial framework enables faster growth, stronger team building, and more efficient capital deployment—the true measures of startup success.