The 89th Texas Legislative Session, which concluded on June 2, 2025, introduced pivotal changes to the state’s tax code, particularly affecting the research and development (R&D) franchise tax credit and the sales and use exemption for R&D-related property. These changes, effective January 1, 2026, are poised to reshape how businesses, especially in technology and manufacturing, approach Texas R&D tax credit strategies.
Key Legislative Changes
Extension and Increased Texas R&D Credit Rate
Senate Bill 2206 extends the Texas R&D franchise tax credit beyond its previous expiration, reinforcing the state’s commitment to innovation. The allowable percentage of qualified research expenses (QREs) has increased from 5% to 8.722%, aligning Texas more closely with federal standards. Notably, the credit may now be refundable in certain cases, offering potential benefits to businesses without immediate franchise tax liabilities.
Alignment With Federal Standards
The definition of “qualified research expense” now directly references line 48 of federal Form 6765, streamlining compliance for dual filers. Statistical sampling is now permitted if aligned with Internal Revenue Service (IRS) Procedure 2011-4. Supplies used in R&D cannot be excluded from QREs based on their taxability status under sales, use or excise tax rules.
Retention of the 20-year Carryforward
The 20-year carryforward provision remains intact, benefiting startups and cyclical businesses by allowing unused credits to offset future liabilities.
Elimination of the Sales Tax Exemption
The option to choose between a sales tax exemption and the franchise tax credit has been eliminated. While businesses must now pay sales tax on R&D-related purchases, these costs can be included in QREs, potentially increasing the total credit due to the higher rate.
Audit Considerations
If an amended federal Form 6765 is filed within the refund window, Texas will adopt the amended figures for franchise tax purposes. Finalized IRS audits will also dictate the corresponding Texas credit amounts. Texas auditors continue to require comprehensive documentation for all business components claimed, regardless of materiality, including technical narratives, financial records and substantiating evidence for each component.
Strategic Considerations
These legislative changes present both opportunities and challenges for Texas-based businesses. The increased credit rate and federal alignment simplify compliance and enhance the credit’s value. The loss of the sales tax exemption necessitates a reevaluation of procurement strategies, particularly for capital equipment. Companies should assess whether the revised credit structure offers greater long-term benefits than the previous exemption model.
Next Steps
Businesses should review their R&D-related purchases and determine how the new rules affect their tax position. They should evaluate whether the refundable credit option applies to their situation and confirm that the documentation is audit-ready, especially for components with a smaller financial impact.
Your Guide Forward
Cherry Bekaert’s R&D Tax Credits team is here to offer comprehensive credit analysis tailored to your industry and operations. We provide documentation support that meets IRS and Texas Comptroller standards, strategic planning to optimize credit utilization and mitigate audit risk, and assistance with amended returns and retroactive claims under the new legislation. Whether you're a startup exploring refundability or a mature enterprise adjusting to the loss of the sales tax exemption, our team can help you unlock the full value of your R&D investments.
