Texas is an energy leader, being one of the highest producers of oil and natural gas in the U.S. However, with such precedence, it also comes with a demanding and dynamic fiscal environment for the operators, contractors, and service providers in the energy sector. And while today the focus may be on energy prices and production volumes, it is just as essential to understand Texas severance tax obligations for long-term profitability and compliance.
At Dabney Tax & Accounting Services, our Houston-based CPA-led team works with oilfield contractors, service providers, and operators across the state to offer informed guidance on Texas oil and gas severance tax and other state-specific tax obligations. Here, we’ve outlined key considerations for 2025 and explained how a proactive approach to compliance may support business stability and growth.
What’s the Texas Severance Tax?
The Texas severance tax applies to non-renewable resources extracted from the earth, such as oil and natural gas. Unlike a profit tax, this production tax is due regardless of whether an operator makes a profit from a given well or not. Many clients also ask, how is severance pay taxed in Texas, which differs from wages or payroll. This tax is applied directly to production, not compensation.
Current Rates and What’s Their Impact
As of 2025, the Texas Comptroller applies:
The Texas Comptroller for 2025 applies:
- 6% on the market value of oil
- 5% on the market value of natural gas
As a Houston oil & gas tax consultant, we have had instances in the Permian Basin where, even though operators were facing several operational challenges and had slim margins, they still owed significant Texas severance tax based on production volume. Such instances show why it is imperative to track production data and pricing in an accurate manner.
Opportunities for Relief in Texas Severance Tax
There are no ways of avoiding Texas severance tax. However, credits may cut down the amount of taxes owed:
- High-Cost Gas Incentives
- Enhanced Oil Recovery (EOR) Credits
- Inactive Well Reactivation Incentives
In our practice, we assist clients in determining which incentives they qualify for, thereby helping them organize the supporting documents. It is critical to maintain an organized record system and engage in proactive planning. These strategies ensure compliance with oil and gas severance tax requirements in Texas.
How to Tackle the Texas Franchise Tax
Texas does not levy a state income tax, but most businesses operating in the state are subject to a Franchise Tax, including oil and gas companies structured as LLCs or corporations. Understanding Texas severance tax alongside franchise tax ensures comprehensive compliance.
Common Misconceptions
Some clients assume that if no tax is due, no filing is necessary. That’s not the case. Even businesses below the $2.47 million no-tax-due threshold must often file a No Tax Due Report and Public Information Report (PIR) annually. Failure to do so may lead to forfeiture of good standing with the state.
In our role offering professional tax compliance services in Houston, TX, we guide oilfield businesses in preparing required filings, even when no payment is due. This helps avoid unnecessary complications during annual reporting.
Margin Calculation Nuances
Franchise tax liability is calculated on a business’s “margin,” which can be determined using several methods. For oil and gas clients, selecting the appropriate calculation method requires evaluating:
- Cost of goods sold (COGS)
- Compensation
- 70% of revenue
Our CPA-led team assists clients in selecting the best approach for their financial structure while maintaining compliance with state guidelines and Texas severance tax obligations.
Considerations for Cross-Border Operations
Many oil and gas companies set up operations across the borders of Texas into Louisiana, Oklahoma, or New Mexico. The specific income threshold and nexus rules of these states may mean that you have to deal with further filing requirements.
We do not file returns for our clients; instead, our Houston tax advisory team guide them in identifying situations where they may need to file returns in other states and to coordinate their reporting strategies accordingly.
For instance, we recently advised a pipeline contractor from West Texas who performed various projects across the New Mexico border. This kind of guidance includes determining where income was sourced from and what thresholds were applicable in order for the contractor to avoid unnecessary filings while remaining compliant.
How to Identify Oil & Gas Business Deductions
Oilfield operations involve substantial expenses, but not all of them qualify as deductions without proper substantiation. We regularly assist clients in reviewing their financials and helping them determine where legitimate deductions may apply. These may include:
- Lease and well development costs
- Transportation and lodging for remote crews
- Depreciation on drilling and service equipment
- Ongoing safety and compliance training
One recent engagement had us working with a Houston drilling contractor on travel expenses for site transition between the Eagle Ford and Midland regions. We assisted the client in substantiating travel costs on business accounts that were previously ignored. This is one area where most operators often miss out on deductions.
What to Consider for Entity Structure and Payroll
For many business owners, the initial decision to form a sole proprietorship or single-member LLC may no longer be the best fit. If the business earns well, establishing an S-Corp for the possibility of reducing self-employment tax may make sense as long as the company is prepared to handle payroll and reporting requirements.
Usually, as your revenue grows, you may have to hire a CPA for a small business in Houston. This way, you get help to look out for structural change opportunities that might impact tax efficiency. Our CPA-led solutions assist business owners with analyzing income patterns, liability considerations, and the administrative burdens of various structures.
In some cases, the transition to an S-Corp structure has allowed clients the separation of owner compensation from business profit, creating a better alignment with IRS expectations, while also reducing the exposure to compliance risk overall.
Forecasting & Planning for Uncertainty
Texas oil and gas businesses frequently deal with variable income due to market shifts. That unpredictability makes quarterly estimated tax payments and cash flow planning particularly important.
As a Houston oil & gas tax consultant, we support clients by projecting Texas severance tax obligations based on prior years and current trends. During higher-income cycles, we also assist with retirement planning options such as SEP IRAs or Solo 401(k) plans. These strategies may help reduce tax exposure while supporting long-term financial health.
So, What’s the Takeaway?
The oil and gas industry in Texas is subject to dual taxation: one is the Texas Severance Tax levied on production, and the other is a Franchise Tax for the privilege of doing business in Texas. So, it is critical to stay informed regarding which laws apply to your company and what the exemptions or thresholds are that may affect filings. It can help you stay compliant with the laws and help you in long-term growth.
At Dabney Tax & Accounting Services, we don’t file returns or guarantee results. What we do offer is CPA-led support tailored to the challenges oilfield businesses face. Our team of Houston oil & gas tax consultants is here to help you make informed decisions grounded in state-specific insight and practical experience. If you’re tackling tax strategy in 2025, Contact our Houston tax accountant to plan strategically for 2025.
