Posted by Jeffrey Feingold on 09.19.25
In May and June of 2025, Texas Governor Greg Abbott signed pivotal legislation that introduces a permanent research and development (R&D) tax credit and makes significant amendments to the state's franchise tax rules. These changes which take effect in 2026, aim to enhance the state's appeal for businesses engaged in innovative research while simplifying the tax landscape.
What Does the New R&D Tax Credit Involve?
One of the most noteworthy changes is the permanent R&D credit against the Texas franchise tax, effective January 1, 2026. This credit replaces the existing, temporary R&D franchise tax credit and the sales tax exemption for property used in R&D activities, both of which were set to expire on December 31, 2026.
Under the new rules, taxpayers can claim a credit based on a percentage of their federal qualified research expenses (QREs) attributable to research conducted in Texas.
Qualified Research Expenses (QREs)
For this purpose, QREs refer to the portion of expenses reported by a taxable entity on Line 48 of federal Form 6765, "Credit for Increasing Research Activities," that can be linked to research done in Texas. The legislation clarifies that expenses associated with supplies, even if they are exempt from sales and use tax, can be included in the calculation for the Texas credit.
How Is the Credit Calculated?
The credit amount is calculated as 8.722% of the difference between:
Refundable Credit: A Major Benefit for Certain Taxpayers
One of the significant provisions of the new law is the refundable nature of the credit if no franchise tax is due. For taxable entities that incur qualified research expenses but are not required to pay franchise tax, the law allows for the full credit to be refunded. The cap on the credit (50% of tax due) does not apply in this case, providing substantial relief for smaller companies or startups that may not yet be generating significant taxable income.
Combined Reporting and Ownership Structures
The new credit rules also address how combined reporting entities can claim the credit. For businesses within a combined group, the credit for QREs is applied on the combined report. An upper-tier entity can claim the credit for QREs incurred by a lower-tier entity based on the level of ownership in that entity.
Carry forward Provisions and Credit Assignment
While the credit is limited to 50% of the tax due in the year it is claimed, any unused portion of the credit can be carried forward for up to 20 consecutive reports. However, the credit cannot be transferred or assigned to another entity unless substantially all the assets of the taxable entity are conveyed in a single transaction.
What Happens to the Existing R&D Franchise Tax Credit?
The new legislation explicitly repeals the existing R&D franchise tax credit, which was set to expire at the end of 2026. Importantly, businesses that were eligible for the existing credit may continue to carry it forward until it expires, in accordance with the old rules. The repeal will not affect any tax liability that has accrued before January 1, 2026, nor will it impact any carryforward of unused credits from prior years.
Sales Tax Exemption for R&D Property
Alongside the R&D credit, the sales tax exemption for property used in R&D activities is also repealed, effective January 1, 2026. This change, however, will not impact any tax liabilities or exemptions that were in place before this date. Importantly, businesses that received a sales tax exemption for R&D property in the period covered by their report will not be eligible for the new R&D credit.
How and When to Claim the Credit
Taxpayers wishing to claim the new R&D tax credit must file their claim with their Texas franchise tax report for the period in which the credit is being claimed. In cases where the tax liabilities are adjusted due to an audit or an amended federal return, businesses must also file an amended report to reflect any changes in the amount of qualified research expenses or taxable margin.
Texas' introduction of a permanent R&D credit marks a significant shift in the state's tax policy aimed at encouraging innovation and R&D activities. The new credit is a welcome incentive for businesses investing in research and development, and the state's move to streamline its tax laws with a more predictable and favorable tax environment signals a commitment to maintaining Texas' position as a hub for innovation.
If you're a business engaged in R&D activities, it’s essential to familiarize yourself with the new requirements and opportunities that come with this legislation. Taking full advantage of the new R&D tax credit can help offset costs and drive continued growth in the Lone Star State.
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.
