Texas has long been a hub for innovation, from Austin’s tech corridor to the energy and manufacturing operations that span the state. As of January 1, 2026, the state’s research and development incentive program looks different, and businesses that qualify have more reason than ever to pay attention.
A New Chapter for the Credit
Texas previously offered businesses a choice between a franchise tax credit or a sales tax exemption for qualified research activities under Subchapter M. The Texas Legislature repealed that structure and replaced it with Subchapter T, a franchise tax only credit. The sales tax exemption is gone. In its place is a stronger, more accessible franchise tax credit designed to reward companies conducting qualified research in Texas.
How the Credit Works
To claim the credit, a business must have filed IRS Form 6765 reporting its qualified research expenses for the year in question. The Texas credit is based on the portion of those federal qualified research expenses attributable to research conducted in Texas. Businesses claim the credit by filing Form 05-158 A and B along with Form 05-181 and Form 05-182 with their franchise tax report.
Credit Amount
The franchise tax credit rate rose from 5 percent to 8.722% of the difference between current year qualified research expenses and 50% of the average qualified research expenses from the three preceding tax periods. Research conducted in partnership with a Texas institution of higher education qualifies for an enhanced rate of 10.903%. Unused credits can be carried forward for up to 20 consecutive franchise tax reports, giving businesses a long runway to use the full value of what they earn.
A Meaningful Change: Refundability
One of the most significant updates is that the credit is now refundable for certain businesses that owe no franchise tax, including qualified new veteran owned businesses and entities with annualized total revenue at or below the No Tax Due Threshold (set at $2.65 million for 2026). This is a meaningful shift for startups and early stage companies that previously could not benefit from the credit until they owed franchise tax.
Who’s Claiming It
Texas has one of the most diverse economies in the country, and that shows in who benefits from this credit. Industries commonly claiming the R&D credit include:
- Engineering and construction firms developing new methods, materials, or processes
- Energy: oil and gas innovation, renewable energy, and battery technology
- Technology and software: particularly out of the Austin corridor, spanning enterprise software, cybersecurity, and cloud services
- Manufacturing
- Biotech and medical devices
What This Means for Your Business
If your company is conducting research in Texas, whether that’s developing new products, improving processes, or testing new materials, it’s worth having a qualified analysis performed to see whether your work rises to the level of qualified research expenses. Given the technical requirements and coordination with federal Form 6765, working with a firm that combines engineering expertise with tax knowledge helps ensure the analysis holds up to scrutiny while capturing the full benefit available.
CSSI is dedicated to helping businesses across the country identify and defend tax savings through detailed, engineering based studies. If you’d like to know whether your Texas operations qualify, request a free analysis to get started.
FAQ: Texas R&D Tax Credit
Is the Texas R&D tax credit the same as the federal R&D credit?
No, but they’re connected. The Texas credit is based on the qualified research expenses a business reports on federal Form 6765, specifically the portion attributable to research conducted in Texas.
Do I need to claim the federal R&D credit to get the Texas credit?
Yes. Businesses must file IRS Form 6765 for each year they want to claim the Texas franchise tax credit under Subchapter T.
What happened to the Texas R&D sales tax exemption?
It was repealed effective January 1, 2026. Businesses can no longer choose between a sales tax exemption and a franchise tax credit. The franchise tax credit is now the only option, and its value was increased to offset the change.
Can a business that owes no franchise tax still benefit?
In many cases, yes. The credit is refundable for qualified new veteran owned businesses and for entities with annualized total revenue at or below the No Tax Due Threshold, which is $2.65 million for 2026.
How much is the credit worth?
Generally 8.722% of the difference between current year qualified research expenses and 50 percent of the average from the prior three tax periods. Research done with a Texas institution of higher education qualifies for a higher rate of 10.903 percent.
Can unused credit be carried forward?
Yes, for up to 20 consecutive franchise tax reports.
Which industries in Texas typically qualify?
Energy, technology and software, manufacturing, biotech and medical devices, and engineering and construction are among the most common, though qualification depends on the nature of the work, not the industry label.
How do I know if my business qualifies?
The best way to find out is through a professional analysis of your research activities and expenses. CSSI offers a free analysis to help determine eligibility and estimate potential savings.
