Understanding the Texas Research & Development (R&D) Tax Credit
Companies that invest in improving an existing product, developing a new one, or resolving meaningful technical uncertainty typically incur expenditures (wages, supplies and contract research) that constitute qualified research expenses (QREs). For years, Texas has rewarded those investments through a tax credit against the state franchise tax, calculated as a percentage of the company’s qualifying Texas research spend.
Under prior law, the regime suffered from two limitations. The first was scale: a 5.000% credit rate that was modest by national standards. The second was utility: the tax credit was non-refundable, leaving pre-revenue ventures, pass-through entities, and other taxpayers without sufficient franchise tax liability with no immediate way to monetize it. Those who were subject to franchise tax could only use the tax credit to offset half of the liability each year, limiting the utilization.
Senate Bill 2206, signed by Governor Abbott in June 2025 and effective for reports originally due on or after January 1, 2026, addresses both shortcomings in a single, coordinated reform.
The Headline Changes
- The standard credit rate increased from 5.000% to 8.722% of qualifying Texas research expenditures — an increase of roughly 75%.
- Research conducted in collaboration with a Texas institution of higher education now qualifies for an enhanced rate of 10.903%, up from 6.250%.
- For qualifying small and pre-revenue businesses, the credit is now refundable, generating cash rather than merely offsetting future franchise tax liability. This effectively bypasses the 50% limitation for companies that have little to no tax liability.
The New Texas R&D Credit Rates
| Type of Research Spending | Old Tax Credit (Before 2026) | New Tax Credit (2026 Onward) |
| Most research done in Texas | 5.000% | 8.722% |
| Research done with a Texas university | 6.250% | 10.903% |
Why Refundability Is the Pivotal Change
Refundability is the single most consequential feature of the new statute. In practical terms, an eligible business that earns more credit than it can absorb against its current Texas franchise tax liability may apply to receive the unused portion as a cash refund from the Comptroller. Under prior law, a pre-revenue startup with substantial qualifying research expenditures realized no immediate state benefit; under the 2026 regime, that same company may receive a check from the state.
Who Qualifies for the Refundable Credit?
An entity is eligible to apply for the refundable credit if it satisfies any one of the following conditions:
- Annualized total revenue of $2.65 million or less (the 2026 “no tax due” threshold).
- Computed Texas franchise tax of less than $1,000 for the report year.
- Qualifying new veteran-owned business status during its first five years of operation.
An Important Interaction To Flag
An entity (or any member of its combined group) that claimed the legacy Section 151.3182 sales and use tax exemption on R&D equipment during the report period is disqualified from refundability for that report. The practical impact of this disqualifier diminishes each year, however, as the underlying exemption was repealed for purchases made on or after January 1, 2026. Since the new legislation was passed mid-year, it will be important to confirm whether this exemption has already been claimed during 2025.
Why the New Regime Is More Favorable for Texas Businesses
- Higher Value: The standard credit rate is approximately 75% larger than its predecessor, and the university-collaboration rate has risen by a comparable margin.
- Cash, Not Merely an Offset: Eligible small, early-stage, and qualifying veteran-owned companies can now monetize the credit directly, transforming a deferred attribute into present-period liquidity.
- Permanence: The previous credit was scheduled to sunset on December 31, 2026; the new credit has no expiration, providing the certainty required for multi-year R&D investment planning.
- Federal Conformity: Texas now mirrors the qualified research definitions under Section 41 and draws QREs directly from IRS Form 6765, materially reducing duplicative compliance work and reconciling state and federal positions. It also corrects the gap between Texas’ historical position on internal use software (IUS) being disqualified for R&D to now align with the Federal definition and be included if it meets the high threshold of innovation test.
- Streamlined Examinations: Favorable IRS audit outcomes flow through to the Texas credit calculation, eliminating the need to defend the same expenditures before two different authorities.
- Methodological Flexibility: Statistical sampling and the Large Business and International (LB&I) directive on ASC 730 financial-statement R&D are explicitly permitted, lowering documentation cost for large filers.
- Premium for University Collaboration: Research undertaken in conjunction with a Texas institution of higher education qualifies at the enhanced 10.903% rate — a meaningful planning lever for companies with academic partnerships.
Modeling the Difference
Consider a hypothetical company with $1,000,000 of qualifying Texas research expenditures in the report year.
| Assuming $1,000,000 of Texas QREs | Prior Law | 2026 Regime |
| Standard credit | $50,000 | $87,220 |
| Research conducted with a Texas university | $62,500 | $109,030 |
For an eligible entity, the $87,220 standard credit (or $109,030 university-collaboration credit) is no longer a deferred reduction of a future franchise tax liability. It can be received as a cash refund from the Comptroller in the year claimed.
The Trade-off: Repeal of the Sales Tax Exemption
The legislation also repealed the longstanding Section 151.3182 sales and use tax exemption for depreciable tangible personal property used in qualifying R&D activities. The repeal applies to purchases made on or after January 1, 2026.
For capital-intensive operations, semiconductor fabrication, life sciences manufacturing, and advanced industrial R&D, among them, the loss of this exemption represents a real cost. For the typical Texas filer, however, the enhanced and refundable franchise credit more than offsets the foregone sales tax savings due to the enhanced R&D tax credit rate of 8.722% exceeding the sales and use tax rate of 8.25% in Texas.
Recommended Next Steps
- Assess Eligibility: Companies engaged in product development, software engineering, process improvement, or scientific testing are frequently strong candidates for the tax credit, even where they have not previously claimed one.
- File IRS Form 6765: Federal filing is now a statutory prerequisite to claiming the Texas tax credit. First-time filers should evaluate the federal three-year lookback in tandem with the corresponding Texas position.
- Pursue Refundability Where Eligible: Refundable-credit applicants must submit Texas Form 05-183 on or before November 15 (extension) of the report year.
- Coordinate Lookback Claims: Federal lookback positions should be aligned with corresponding amended Texas franchise tax reports to maximize cumulative cash recovery.
- Inventory University Partnerships: Research performed in conjunction with a Texas institution of higher education qualifies at the enhanced 10.903% rate; documentation should clearly support the higher tier.
How To Claim the 2026 Texas R&D Tax Credit
For Texas businesses engaged in research of any meaningful scale, the 2026 reforms represent a substantive improvement over the legacy regime. The credit is larger, the compliance burden is lighter, the framework is permanent, and, for the first time, it generates cash for taxpayers who lack sufficient franchise tax liability to absorb it. The entities best positioned to benefit are precisely those that the prior regime overlooked: small businesses, early-stage ventures and pass-through companies whose owners are not in a federal-tax position. The path forward is straightforward:
- Confirm eligibility
- File the federal Form 6765
- (Where appropriate) apply for the refund
Your Guide Forward
Cherry Bekaert’s Tax Credits & Incentives Advisory group helps Texas businesses identify, quantify and defend research credits under the expanded 2026 regime. Our knowledgeable team will assess eligibility, calculate federal and Texas R&D tax credit value, manage filings and refund claims, and coordinate multi-year lookbacks to maximize cash recovery. From first-time filers to established taxpayers, we deliver clear, well-documented, and defensible outcomes, backed by deep examination and controversy experience.
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