Texas has enacted significant changes to how businesses benefit from research and development (R&D) tax incentives. Starting January 1, 2026, the state is streamlining its R&D benefits by replacing the current dual system with a single, enhanced franchise tax credit.

What’s Changing?

Out: Current dual system offering both a sales tax exemption on R&D equipment AND a franchise tax credit

In: A single, more generous franchise tax credit with significantly higher rates

Key Benefits of the New R&D Tax Credit

Increased Credit Rates

The standard rate increases from 5% to 8.722% of qualified research expenses, with an enhanced rate of 10.903% available for research conducted with Texas universities. Unlike the previous credit that was set to expire, this permanent incentive provides long-term certainty for business planning.

Simplified Administration

The new credit aligns with federal IRS Form 6765 requirements, making compliance easier and reducing administrative burden through consistency between federal and state R&D credit calculations.

Enhanced Benefits

Qualifying businesses can now access refundable credits, which is especially beneficial for startups and companies with limited franchise tax liability. Unused credits can be carried forward for 20 years, though they’re capped at 50% of franchise tax liability.

What You’re Losing: Sales Tax Exemption

The sales and use tax exemption for R&D equipment purchases ends January 1, 2026. Businesses will pay sales tax on equipment purchases, leases, and rentals for research activities.

Strategic Timing: Act Before 2026

Accelerate Equipment Purchases: If you currently use the R&D sales tax exemption, consider purchasing equipment in 2025 to capture this benefit before it expires.

Evaluate Your Position: The enhanced credit rates may be more valuable than the current system, especially for businesses that have significant R&D expenses but minimal equipment purchases, partner with Texas universities, or are startups with limited franchise tax liability.

Who Benefits Most?

Technology companies with high R&D expenses stand to gain significantly, as do startups and smaller businesses that can now access refundable credits. Companies partnering with Texas universities can take advantage of the enhanced 10.903% rate, while businesses planning long-term R&D investments benefit from the permanent nature of the credit.

Businesses cannot claim both the old sales tax exemption and new credit for the same period. Federal Form 6765 must be filed to claim the Texas credit, and existing unused credits can be carried forward under specific rules.

These changes present both opportunities and challenges. Enhanced credit rates could provide substantial tax savings, but eliminating the sales tax exemption requires careful planning.

To know more about how these changes will impact your business and help you develop a strategy to maximize your R&D tax benefits under the new framework, connect with our state and local tax services team here.