Texas Makes R&D Credit Permanent: What Businesses Should Know Before 2026 Filing Season 

Texas is changing how businesses capture R&D tax value

Texas businesses investing in product development, process improvement, engineering, software development, testing, design, or other qualifying research activities will have a new incentive structure to evaluate in 2026.

Senate Bill 2206, passed by the 89th Texas Legislature, makes the Texas research and development franchise tax credit permanent and significantly changes how the credit will be calculated, documented, and claimed. For companies already claiming the federal R&D tax credit, the new Texas framework may create a more streamlined opportunity to capture additional state-level benefit. For companies that have not historically evaluated R&D incentives, the changes may make now the right time to revisit eligibility.

The law takes effect January 1, 2026, and applies to Texas franchise tax reporting. The annual Texas Franchise Tax Report is generally due May 15, which means businesses should begin preparing well before the filing deadline.

Higher credit rates create a stronger incentive

One of the most notable changes is the increase in the Texas R&D credit rate. Under SB 2206, the standard credit rate increases from 5.0% to 8.722%. For qualifying research conducted through a public or private institution of higher education, the rate increases from 6.25% to 10.903%.

That increase may be meaningful for companies with ongoing research activity in Texas, especially manufacturers, technology companies, life sciences businesses, engineering firms, energy companies, and other businesses that regularly improve products, processes, formulas, techniques, software, or production methods.

The legislation also allows unused credits to be carried forward for 20 years, giving businesses a longer planning horizon if the credit exceeds current franchise tax liability.

Compliance may become more practical

SB 2206 also aligns Texas R&D qualification standards more directly with the federal R&D credit reported on IRS Form 6765. Qualified research expenses for Texas purposes are tied to the portion of federal qualified research expenses attributable to research conducted in Texas.

This alignment may help reduce some of the complexity that has historically made state R&D credit documentation difficult. The law also permits federal methodologies, including statistical sampling and ASC 730 approaches, which may help taxpayers use more familiar and supportable methods when calculating and documenting claims.

That does not mean the credit is automatic. Businesses still need contemporaneous support for qualified activities, expenses, project purpose, technical uncertainty, experimentation, and the Texas location of the research activity. Companies should also ensure their federal R&D credit position and Texas credit position are coordinated.

Refundability may expand access

The new law also creates a refundable R&D credit for certain taxpayers with no franchise tax liability. This may include businesses below the $2.65 million No Tax Due threshold, taxpayers owing less than $1,000 in franchise tax, and qualified new veteran-owned businesses.

This is an important shift. Emerging companies and smaller businesses often invest heavily in development before they generate meaningful taxable income or franchise tax liability. Refundability may allow some of those taxpayers to receive value from qualifying R&D activity earlier in their growth cycle.

Businesses at or below the No Tax Due threshold may also be able to submit a zero-money extension request through Webfile if pursuing the R&D cash refund, rather than sending an upfront payment.

The sales tax exemption is going away

SB 2206 also repeals the Texas R&D sales and use tax exemption effective January 1, 2026. That change is important for businesses that previously relied on the exemption for qualifying R&D equipment or property purchases.

Going forward, the enhanced franchise tax credit will become the primary Texas R&D incentive. Companies should review their current incentive strategy, especially if they have historically focused more on sales tax savings than franchise tax credits.

What businesses should do before filing

The 2026 filing season may arrive faster than expected. Businesses should begin by identifying Texas-based projects that may qualify, mapping expenses to federal Form 6765, reviewing documentation, and evaluating whether they may benefit from the higher credit rates or refundable credit provisions.

For companies that file an extension, Texas Comptroller Form 05-164 must generally be submitted by the original May 15 deadline. To avoid penalties, taxpayers typically must pay either 100% of the franchise tax paid in the prior tax year or at least 90% of the tax due for the current report year.

The new Texas R&D credit creates a stronger and more permanent incentive, but capturing the benefit will still require careful planning. Businesses that prepare early will be better positioned to document eligibility, coordinate federal and state filings, and make the most of the expanded Texas opportunity.

Start planning now to maximize the credit

These changes include several time-sensitive planning and filing considerations. Businesses should evaluate eligibility, documentation requirements, extension strategies, and available incentives well before applicable filing deadlines to maximize the benefit of the new law.

Start Planning Now