On June 17, 2025, Texas Governor Greg Abbott signed a bill (SB 2206), replacing the research and development (R&D) franchise tax credit for certain R&D expenses with a new franchise tax credit for R&D expenses¹ and repealing the sales and use tax exemption for depreciable tangible personal property directly used in R&D activities. These changes take effect on January 1, 2026.

New R&D credit

Taxpayers with qualified research expenses (QREs) are allowed to claim the new R&D tax credit against their franchise tax reports originally due on or after January 1, 2026. The following highlights some of the most significant changes to the Texas R&D Credit:

• Adheres to the federal R&D tax credit: Under the new law, a taxable entity’s Texas R&D credit will be calculated based on the amount reported on IRS Form 6765 (subject to Texas QREs) and the relevant federal income tax law in effect for the applicable tax year (rolling conformity to the federal R&D credit).
• QREs: The new law defines QREs as the amount reported as QREs on IRS Form 6765 that are attributable to research conducted in Texas. The new law also establishes that if a taxpayer meets IRS requirements for recognizing QREs as the amount stated as the taxpayer’s adjusted Accounting Standards Codification (ASC) 730 financial statement R&D, the Comptroller will do the same. In an effort to reduce the workload of IRS auditors, the IRS’s examination guidance allows Large Business and International (LB&I) Division examiners to accept, as sufficient evidence of QREs, an eligible taxpayer’s adjusted Accounting Standards Codification (ASC) 730 financial statement R&D.
• Statistical sampling: The new law allows the use of statistical sampling procedures permitted by the IRS in the determination of Texas QREs.
• Supplies as QREs: Supplies properly included in QREs under federal income tax law cannot be excluded on the basis of the sales tax treatment of those supplies under Texas law.
• Increased credit amount: The Texas credit is computed as 8.722% of new and increasing QREs incurred in the state (new and increasing R&D in Texas) (compared to 5% under current law), or 10.903% if the research is performed by a public or private institute of higher education (compared to 6.25% under current law). The new R&D credit equals 8.722% of the difference between (1) the QREs incurred during the period on which the report is based (hereafter “report period”), and (2) 50% of the average amount of QREs incurred during the three tax periods preceding the report period (hereafter “prior period”). The credit amount increases to 10.903%, if a taxpayer contracts with a public or private institution of higher education and the taxpayer incurs QREs under the contract during the report period. If a taxpayer does not have QREs in one or more of the prior periods, the amount of the credit is 4.361% of QREs incurred during the report period and 5.451% of all QREs incurred during the report period if the taxpayer contracts with an institution of higher education.
• Refundable credit for certain taxpayers: Certain taxpayers that incur QREs for a period in which they are not required to pay franchise tax will be entitled to receive the amount of credit they otherwise would be entitled to as a refundable credit. Such taxpayers include: (1) a new veteran-owned business; (2) a taxpayer whose computed tax is less than $1,000; and (3) a taxpayer whose total revenue from its entire business is not more than $2.47 million or the amount determined under Tex. Tax Code Section 171.006 for the 12-month period on which margin is based. The credit limitation, which otherwise applies to the amount of R&D credit that may be claimed, does not apply in determining the refundable amount.
• Amended reports if federal QREs are changed: Taxpayers are required to file an amended report if the amount of QREs incurred is changed as a result of a federal audit or adjustment or by reason of the taxpayer filing an amended federal income tax return.
• Repeal of current R&D franchise tax credit and the R&D sales tax exemption: The current franchise tax credit in Subchapter M, Chapter 171, Tax Code, and the current sales tax exemption for R&D in Tex. Tax Code Section 151.3182, are repealed on January 1, 2026.

Implications

The new Texas R&D credit extends the tax credit beyond its current expiration of December 31, 2026, and is intended to make the administration of the credit more efficient for both taxpayers and the Texas Comptroller of Public Accounts by adhering to the federal R&D credit.