Texas has long been a powerhouse for innovation, from energy technology breakthroughs in Houston to cutting-edge software development in Austin. Now, the Lone Star State is doubling down on its commitment to research and development with significant changes to its R&D tax credit program that could reshape how innovative businesses approach their tax planning.

The Current Landscape: What’s Changing and Why

The Texas R&D tax credit program has been a valuable incentive for businesses conducting qualified research activities within the state. However, the current program was set to expire on December 31, 2026, creating uncertainty for companies making long-term R&D investments. Recognizing this challenge, the Texas legislature has introduced comprehensive reforms tthat promise to modernize and expand the program.

Four Key Changes That Will Impact Your Business

1. Higher Credit Rate: From 5% to 8.722%

Perhaps the most financially impactful change is the increase in the credit rate. The R&D Bills will increase the taxpayer’s allowable research and development expenditures from 5% to 8.722% for franchise tax credit purposes.

Certain entities that have no franchise tax liability can also now receive a refundable R&D credit as part of these enhancements—that means real, liquid funding that hadn’t been available for certain Texas businesses under previous policies. This is especially valuable for startups, SMBs, and new veteran-owned businesses that fall below the “no tax due” threshold.

What’s more, the standard credit rate is even higher for businesses that work with Texas-based higher education institutions, clocking in at 10.903% versus the new 8.722% for standard R&D expenditures.

What this means for you: A company with $1 million in qualified R&D expenses would see their credit increase from $50,000 to approximately $87,220 annually—a 74% increase in tax benefits.

2. Extension Beyond 2026 (With a Catch)

The most immediate concern for businesses has been the program’s looming expiration. The R&D bills seek to extend the credit beyond its current expiration date, providing much-needed continuity for companies planning multi-year research initiatives.

However, there’s an important nuance here. Although the R&D bills do not include a specific sunset date, they also do not specifically insure the program’s longevity. Business advocates had pushed for permanent status, arguing that removing any end date would encourage more substantial long-term investments in research and manufacturing.

What this means for you: While the immediate crisis is averted, businesses should continue to advocate for permanent status and plan for potential future changes to the program.

3. Simplified Administration Through Federal Alignment

One of the most significant changes involves aligning the Texas program more closely with the federal R&D credit system. Currently, Texas uses its own separate calculation method, which creates additional compliance burdens for businesses already navigating federal R&D credit requirements.

The R&D bills would create a program that adheres more closely to the federal R&D credit. This is a significant change, which is intended to simplify the administration of the R&D Credit in Texas.

What this means for you: If you’re already claiming the federal R&D credit, the administrative burden for the Texas credit should decrease significantly. This alignment could also reduce the risk of inconsistencies between federal and state positions on what constitutes qualified research.

4. Elimination of Sales Tax Exemption Option

The current system allows businesses to choose between a franchise tax credit or a sales tax exemption on qualified research property. The R&D bills would eliminate this choice, maintaining only the franchise tax credit, citing administrative difficulties that have been experienced under the current regime.

What this means for you: You’ll need to reassess your tax planning strategy. While you’ll lose the flexibility of choosing between options, the higher credit rate may more than compensate for businesses that were previously using the sales tax exemption.

The Economic Impact: Why Texas is Making This Investment

The proposed changes aren’t just about tax policy—they’re about economic development. A study by Rice University’s Baker Institute found that a strong R&D Credit program may generate over 113,000 jobs in the state by 2035, with over $13 billion dollars generated, including a total investment boost of 0.25% during the first year.

These projections underscore why Texas lawmakers are prioritizing R&D incentives despite budget pressures. The state is betting that enhanced R&D credits will attract more innovative companies and encourage existing businesses to expand their research activities within Texas borders.

Actionable Steps for Your Business

For Companies Currently Claiming the Texas R&D Credit:

  1. Model the financial impact of the increased credit rate on your tax planning
  2. Review your R&D documentation practices to ensure they align with federal standards

For Companies Not Currently Using the Texas R&D Credit:

  1. Assess your eligibility under the new rules
  2. Calculate potential savings using the proposed 8.722% rate
  3. Consider the timing of R&D expenditures
  4. Evaluate Texas as a location for expanded R&D activities

For All Businesses:

  1. Engage with industry associations to advocate for permanent program status
  2. Prepare for implementation by ensuring your R&D tracking systems can accommodate federal alignment
  3. Consult with tax professionals who understand both federal and state R&D credit requirements

Looking Ahead: Timeline and Implementation

While Senate Bill 2206 has cleared the Finance Committee, both bills still need to pass their respective chambers and be signed into law. Given the strong bipartisan support and economic benefits, passage appears likely, but businesses should monitor the legislative process closely.

If enacted, the new program would operate under a separate legal structure (Subchapter T), suggesting a clean break from the current system rather than a modification of existing rules.

The Bottom Line

Texas is positioning itself to become more competitive in attracting R&D investment through these proposed changes. The combination of federal alignment, higher credit rates, and program extension creates a compelling package for innovative businesses.

However, success will depend on careful planning and execution. Companies should begin preparing now for the transition, whether that means adjusting documentation practices, recalculating potential benefits, or considering Texas for expanded R&D operations.

The message from Austin is clear: Texas wants to be your R&D destination. The question is whether your business is ready to take advantage of these enhanced incentives.

Frequently Asked Questions

Yes, the federal and state credits are separate programs. The proposed changes would actually make it easier to claim both by aligning the Texas program more closely with federal requirements.

The credit rate would increase from 5% to 8.722% of qualified expenses—a 74% increase. A company with $500,000 in qualified R&D expenses would see their credit increase from $25,000 to approximately $43,610. For businesses working with higher education institutions in Texas, this rate jumps to 10.903%.

The proposed legislation would eliminate the current choice between franchise tax credit and sales tax exemption, keeping only the franchise tax credit option. However, the higher credit rate may provide greater benefits.

The federal alignment suggests that documentation meeting federal R&D credit standards should also satisfy Texas requirements, potentially simplifying compliance.

Since the program would align more closely with federal standards, activities that qualify for the federal R&D credit should also qualify for the Texas credit. This includes systematic experimentation to eliminate technical uncertainty in developing new or improved products, processes, or software.

Yes, as long as they have qualified R&D expenses and Texas franchise tax liability. The credit can be particularly valuable for growing companies with significant R&D investments.

The current legislation doesn’t specify credit caps, but this could change as the bills move through the legislative process. Businesses should monitor developments closely.

Even with the increase to 8.722%, Texas would still be in the lower tier compared to other states, which offer credits ranging from 5% to 27%. However, Texas’s overall business-friendly environment and lack of personal income tax provide additional advantages.