R&D Tax Credits are available in Texas

Yes – but the Texas R&D incentive has undergone a significant overhaul.

For reports originally due on or after January 1, 2026, Texas replaced its prior Research Development (R&D) Tax Credit framework with a new, more streamlined franchise tax credit under Subchapter T. The previous structure, which allowed taxpayers to choose between a franchise tax credit and a sales and use tax exemption, has been repealed for future periods.

Key Highlights of the New Texas R&D Credit (Effective 2026 and Forward)

Aligned with Federal R&D Credit
Qualified Research Expenses (QREs) follow IRC §41 and are based on amounts reported on IRS Form 6765 (line 48). Only research conducted within Texas qualifies.

Increased Credit Rate
The credit equals:

    • 722% of the excess QREs over the base amount
    • 903% for eligible research conducted in collaboration with Texas public or private institutions of higher education

Incremental Calculation Structure
The credit is calculated based on the increase in QREs over a base amount, generally consistent with federal methodology.

Refundable Credit for Certain Taxpayers
The credit may be refundable for entities that:

    • Fall below the no-tax-due threshold
    • Owe less than $1,000 in franchise tax
    • Qualify as certain veteran-owned businesses
    • Note: Taxpayers using the E-Z computation are not eligible for refunds.

No Dual Benefit with Sales Tax Exemption
Taxpayers that claim a Texas R&D credit may not also claim a sales and use tax exemption for R&D activities for the same period. The prior sales tax exemption has been eliminated for periods beginning in 2026.

Application of Credit
The credit may be applied against Texas franchise tax liability, subject to applicable limitations.

Carryforwards
Unused credits may be carried forward for up to 20 consecutive report years.

Filing Requirements
Taxpayers must:

    • File IRS Form 6765
    • Submit required Texas forms, including the R&D credit schedule and franchise tax report
    • File specific refund forms if claiming a refundable credit

Texas R&D Tax Credit Case Study

An Austin-based software developer began operations in 2006. The Company has steadily increased its research expenditures primarily through the addition of both experienced and inexperienced developers. The client has been claiming the federal R&D Tax Credit since 2009 and the Texas R&D Tax Credit beginning for tax year ended December 31, 2013.

FEDERAL
TEXAS
Year
Total QREs
Credit
Total QREs
Credit
2014
$750,000
$75,000
$750,000
$24,583
2013
650,000
65,000
650,000
22,500
2012
500,000
50,000
500,000
NA
2011
400,000
40,000
400,000
NA
Total $2,300,000 $230,000 $2,300,000 $47,083

You can read more about this Texas tax credit case study here.

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

  • Technological in Nature
    Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

  • Permitted Purpose
    Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

  • Eliminate Uncertainty
    Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

  • Experimentation
    All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.