Posted by Jeffrey Feingold on 05.02.25
Texas has firmly established itself as a national leader in business innovation and technology. One of the most anticipated topics in tax discussions is whether the state will extend and modify the Texas Research and Development Credit (R&D Credit), which is currently set to expire on December 31st, 2026.
Senate Bill 2206 and House Bill 4393 were introduced by Senators Paul Bettencourt and Joan Huffman, along with Representative Charlie Geren, in March 2025. These two bills are collectively referred to as the R&D Bills. The Finance Committee unanimously approved Senate Bill 2206 on April 9, and it will now move to the full Senate for consideration. Meanwhile, House Bill 4394 was referred to the Ways and Means Committee on April 1.
According to the analysis provided by Senators Bettencourt and Huffman, the objective of Senate Bill 2206 is to extend the franchise tax credit beyond the current expiration date of December 31, 2026. Additionally, the bill aims to streamline the administration of the credit for both taxpayers and the Comptroller of Public Accounts of the State of Texas. This will involve aligning the state credit more closely with the federal R&D credit, effectively leveraging the work of the Internal Revenue Service and reducing the burden on the Comptroller's resources.
If passed, the R&D Bills would replace Texas’s current regime with a new R&D Credit program established under Subchapter T. Here are some significant changes proposed by the R&D Bills:
Extension of the R&D Credit Beyond December 31, 2026: The current version of the R&D Bills aims to extend the credit past its existing expiration date. While the Bills do not specify a sunset date, they also do not guarantee the program's longevity. It is important to note that business representatives have advocated for explicit assurances regarding the credit's duration, arguing that removing any end date for tax advantages would lead to greater economic investment in research and manufacturing.
Repeal of the R&D Sales Tax Exemption: The current versions of the R&D Bills do not include a sales tax exemption, aiming to address administrative challenges faced under the existing regime. Under the current R&D Credit, sales tax and franchise tax credits are mutually exclusive; taxpayers must choose between (1) a sales and use tax exemption on the purchase, lease, rental, storage, or use of qualified research property or (2) a franchise tax credit based on qualified research expenses. The R&D Bills would eliminate this choice and maintain only the franchise tax credit.
Alignment with the Federal R&D Credit: The R&D Bills propose a program that aligns more closely with the federal R&D credit. This change is intended to simplify the administration of the R&D Credit in Texas. Currently, Texas’s R&D Credit relies on a separate calculation that does not match the federal R&D credit program.
Increase in Allowable Expenditures: The R&D Bills also propose increasing the allowable research and development expenditures for franchise tax credit purposes from 5% to 8.722%. Generally, R&D programs in other states permit research and development expenditures ranging from 5% to 27%.
A study conducted by Rice University’s Baker Institute, published on March 13, found that a strong R&D credit program could create over 113,000 jobs in Texas by 2035. Additionally, the study estimated that such a program might generate over $13 billion, with an initial investment boost of 0.25% in the first year.
Business representatives have expressed strong support for maintaining a R&D credit incentive program in Texas. Senate Bill 2206 and House Bill 4393 are initial steps toward achieving this goal by expanding the R&D credit and preventing its expiration.
Closing the R&D Investment Gap
Despite its size and economic output, Texas significantly underperforms in R&D investment compared to peer states:
A more competitive R&D tax policy would strengthen Texas ’appeal to high-growth sectors and support business expansion and relocation efforts.
Economic Impact of Enhanced R&D Incentives
The Baker Institute’s findings underscore the long-term economic advantages of a stronger R&D credit:
These outcomes would not only attract innovative enterprises but also enhance job opportunities and overall economic well-being for Texans.
Financial Responsibility and Economic Returns
While tax incentives often raise concerns about their impact on state revenue, the study finds that the economic growth spurred by R&D investment would more than offset the cost:
These figures demonstrate that the enhanced R&D credit is not only fiscally responsible but also economically advantageous.
Extending these incentives is critical to attracting high-tech industries, creating jobs, and maintaining Texas’s position as a national leader in technology and innovation. Texas has long been a magnet for innovation, entrepreneurship, and economic growth. To maintain this trajectory, lawmakers must take decisive action. Senate Bill 2206 and House Bill 4393 would extend and enhance the state’s R&D tax credit, ensuring that Texas remains competitive, future-ready, and attractive to businesses operating on the cutting edge of research and technology. By investing in innovation today, Texas can secure its economic leadership for generations to come.
Find Out if Your Activities Qualify
The R&D tax credit can be a lucrative incentive for innovative businesses in Texas. Now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.
Request a free assessment to determine qualifying R&D tax credit eligibility.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.
