Texas rewrites its R&D credit: What businesses should know

Texas significantly changed its research and development credit beginning with 2026 franchise tax reports. The new rules increase the applicable credit rates, tie Texas qualified research expenses more directly to the federal R&D credit, and, perhaps most significantly, allow certain companies that owe no Texas franchise tax to receive the credit as a cash refund.

For companies investing in product development, engineering, software, manufacturing processes, or other qualified research, the changes can materially increase the value of the Texas credit and may create a benefit for companies that historically received little or no immediate value from it.

What changed?

The new Texas R&D credit became effective January 1, 2026. For calendar year taxpayers, the 2026 Texas franchise tax report generally reflects qualified research activity from 2025.

Under the standard calculation, the credit equals 8.722% of current period Texas qualified research expenses in excess of 50% of the average qualified research expenses from the preceding three periods. If the company had no qualified research expenses in one or more of those prior periods, the credit is instead 4.361% of current period qualified research expenses.

Texas has also tied the credit much more closely to the federal R&D calculation. Qualified research expense is generally the portion of qualified research expenses reported on federal Form 6765 that is attributable to research conducted in Texas. As a result, the federal R&D credit calculation now has a direct impact on the Texas benefit.

Companies paying Texas franchise tax may have a larger opportunity

For businesses already paying Texas franchise tax, the increased credit rate can create a significantly larger benefit. One area that deserves particular attention is the choice between the Texas E-Z computation and the regular long form computation.

Companies with $20 million or less in total revenue may elect the E-Z computation, but companies making that election generally cannot claim the R&D credit. With the standard credit rate increasing from 5% to 8.722%, companies with meaningful R&D activity should compare E-Z tax versus long form franchise tax after the R&D credit. The E-Z method may still produce the better result, but the larger credit can change the economics of that decision.

For companies already filing the long form, the analysis is more straightforward. The R&D credit can offset up to 50% of franchise tax otherwise due before other applicable credits, and amounts limited by the 50% cap can generally be carried forward for up to 20 consecutive reports. Existing credits generated under the prior Texas R&D regime also remain available under the applicable carryforward rules.

Companies that owe no franchise tax can now receive cash

One of the most significant changes is the new refundable credit. Certain taxable entities that owe no Texas franchise tax can receive their otherwise allowable R&D credit as a cash refund, and the normal 50% limitation does not apply to these refunds.

A company may qualify if its computed franchise tax is less than $1,000, its annualized revenue is at or below the applicable no-tax-due threshold, or it is a qualifying new veteran-owned business. A company using the E-Z computation is not eligible for the refundable credit, even if its computed tax is below $1,000.

For example, assume a company has $800,000 of Texas qualified research expenses and had no qualified research expenses in one or more of the preceding three periods. At the 4.361% credit rate, its potential Texas R&D credit would be approximately $34,900. If the company otherwise owes no Texas franchise tax and satisfies the refundable credit requirements, that amount may be available as a cash refund rather than a credit carried forward to future years.

For companies already preparing a federal R&D credit study, this creates the potential for an additional cash benefit using substantially the same underlying research activity.

The federal R&D claim matters more under the new rules

The new Texas rules create a much tighter relationship between the federal and state R&D positions. Taxpayers claiming the Texas credit generally must have filed federal Form 6765 for the applicable year, and companies requesting a refundable credit must also provide a copy of Form 6765 with the Texas refund application.

Texas qualified research expenses are determined from the federal qualified research expense population based on the portion attributable to research conducted in Texas. For companies with remote employees, multistate engineering teams, or contractors working across jurisdictions, properly sourcing those costs to Texas can therefore become an important part of the calculation. The prior three-year base must also be developed consistently using the same methodology applied to the current period.

The prior R&D sales tax exemption is gone

The legislation also repealed the prior Texas sales tax exemption for certain R&D purchases. A taxable entity, or member of its combined group, that received the former R&D sales tax exemption during the period on which the franchise tax report is based cannot generate the new Texas R&D credit or refundable credit for that same period.

For companies evaluating a 2026 claim, prior use of the sales tax exemption should therefore be part of the eligibility review.

How is the credit claimed?

Companies that owe franchise tax claim the R&D credit using the Texas long form franchise tax report and applicable credit schedules. Companies seeking a refundable credit must file Form 05-183, Texas Application for Franchise Tax Subchapter T Research and Development Activities Refundable Credit, along with the applicable federal Form 6765. Combined groups must also file Form 05-184.

The refundable credit application is due November 15 of the applicable report year. The Comptroller states that Form 05-183 will not be accepted after that deadline.

What should companies evaluate?

For companies with meaningful R&D activity in Texas, the new rules should be evaluated alongside the federal R&D credit rather than as a separate state compliance exercise.

Companies paying franchise tax should consider the larger credit, existing carryforwards, and whether the long form computation produces a better result than the E-Z method after credits. Companies that owe no franchise tax should determine whether qualified research activity that previously produced little or no immediate Texas benefit can now generate a cash refund.

Vallou prepares federal and state R&D credit studies and Section 174 analyses, with CPA review on every study. We help companies identify and document qualified research, align state credit calculations with federal Form 6765, model available tax benefits, and prepare applicable credit and refund claims.