Texas expands R&D tax credit; ends sales tax exemption

ARTICLE | June 20, 2025

Authored by RSM US LLP

Executive summary

On June 17, 2025, Texas Gov. Greg Abbott signed Senate Bill 2206, amending the Texas research and development (R&D) tax credit incentive framework, effective Jan. 1, 2026. The new legislation eliminates the sales and use tax exemption for R&D equipment and replaces the current franchise tax credit with a more substantial, permanent structure. The new legislation more closely aligns with the federal R&D tax credit, raises the credit amount and simplifies compliance, providing greater certainty and clarity for businesses. The amended framework is briefly described in this article.

New R&D tax credit framework

Effective Jan. 1, 2026, Senate Bill 2206 consolidates Texas's dual-incentive structure into a single, performance-based franchise tax credit while repealing the current sales and use tax exemption for R&D equipment. The change introduces a new credit framework, increasing the base credit to 8.722% from 5%. An enhanced 10.903% rate is also available to research conducted through Texas-based higher education institutions. The amount of credit is based on the relevant rate multiplied by the difference between the qualified research expenses made during the period and 50% of the average of qualified research expenses incurred during the three tax periods preceding the period. For businesses without a prior three-year R&D history, a standard rate of 4.361% or an enhanced rate of 5.451% would apply.

Additionally, ‘qualified research expenses’ is now defined as the portion of the amount reported by a taxpayer as the total qualified research expenses on line 48 of IRS Form 6765. The legislation allows taxpayers to recognize amounts accepted by the IRS, including adjustments through audit or amended returns. Statistical sampling and Accounting Standards Codification 730-based substantiation are also permitted under specified conditions.

The credit is generally nontransferable and capped at 50% of the franchise tax due. Unused credits may be carried forward for up to 20 years, but ordering rules are established for credits earned under prior R&D tax credits. Certain taxpayers that are not required to pay the franchise tax may be eligible for a refund instead of carrying the credit forward. However, the legislation prohibits taxpayers from claiming the new credit for any period in which they utilized the repealed sales tax exemption. Finally, a credit incurred by a member of a combined group must be claimed on the combined report, establishing the combined group as the taxable entity.

The Texas Legislative Budget Board projects a net revenue reduction of $248 million for fiscal year (FY) 2026–27, rising to over $1 billion by FY 2028–29. General revenue will be used to maintain contributions to the Property Tax Relief Fund, as necessary, due to implementation of the new regime.

Takeaways

Senate Bill 2206 streamlines the state’s R&D incentives by repealing the sales tax exemption and implementing an enhanced, permanent tax credit related to qualified R&D expenses. With increased credit rates, refundability and federal alignment, the new structure positions Texas as a competitive state for future research investments. Noteworthy, Iowa recently replaced its R&D tax credit program, and Michigan enacted a new R&D tax credit program earlier this year.

Texas businesses conducting R&D activities should consider accelerating equipment purchases in 2025 to benefit from the expiring R&D sales tax exemption and evaluate whether the expanded credit opportunity is viable for their business for 2026 moving forward. State and federal R&D tax credit calculations and modeling can be complex and should be undertaken before investment commences. Businesses with questions about the new Texas R&D tax credit or other state R&D tax credits should consult with their state tax advisers to assess the implications of those opportunities as soon as possible.

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