Texas has always been a leader in innovation, from major energy tech breakthroughs in Houston to world-class software development in Austin. Now, the Lone Star State is taking its commitment to research and development even further with major updates to its R&D tax credit program that could change the way innovative companies approach their tax strategies.

The Current Landscape: What’s Changing and Why

The Texas R&D tax credit program has long been a valuable incentive for businesses conducting qualified research in the state. But with the program set to expire on December 31, 2026, many companies have faced uncertainty about making long-term R&D investments. To address this, Texas lawmakers have introduced comprehensive reforms designed to modernize and expand the program.

Four Key Changes That Will Impact Your Business

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

The most impactful financial change is the increase in the credit rate. The new R&D bills will raise the credit rate for qualified research and development expenditures from 5% to 8.722% for franchise tax purposes.

In addition, some businesses with no franchise tax liability can now receive a refundable R&D credit—meaning real cash back, not just a tax reduction. This is a game-changer for startups, small businesses, and new veteran-owned companies that fall below the “no tax due” threshold.

Even better, the standard credit rate is higher for companies partnering with Texas-based higher education institutions, reaching 10.903% compared to the new 8.722% for standard R&D expenses.

What this means for you: If your company has $1 million in qualified R&D expenses, your credit would jump from $50,000 to about $87,220 each year—a 74% increase in tax benefits.

2. Extension Beyond 2026 (With a Catch)

The biggest concern for many businesses has been the program’s upcoming expiration. The new R&D bills aim to extend the credit beyond the current end date, giving companies the certainty they need for multi-year research projects.

However, there’s a key detail to note. While the bills don’t set a new expiration date, they also don’t guarantee the program will last forever. Business advocates pushed for permanent status, arguing that removing any sunset date would encourage bigger, long-term investments in research and manufacturing.

What this means for you: The immediate risk of expiration is gone, but it’s still important to advocate for permanent status and to plan for possible future changes.

3. Simplified Administration Through Federal Alignment

Another major change is that Texas will now align its program more closely with the federal R&D credit system. Currently, Texas uses its own calculation method, which adds extra compliance work for businesses already dealing with federal R&D credit requirements.

The new bills would bring Texas’s program in line with the federal R&D credit, making administration much simpler for Texas businesses.

What this means for you: If you already claim the federal R&D credit, your paperwork for the Texas credit should get much easier. This alignment also helps reduce the risk of conflicting definitions of qualified research between state and federal rules.

4. Elimination of Sales Tax Exemption Option

Right now, businesses can choose between a franchise tax credit or a sales tax exemption for qualified research property. The new R&D bills would remove this choice, keeping only the franchise tax credit, due to administrative challenges with the current system.

What this means for you: You’ll need to revisit your tax planning. While you’ll lose the flexibility of choosing between options, the higher credit rate may more than make up for the loss if you previously used the sales tax exemption.

The Economic Impact: Why Texas is Making This Investment

These changes aren’t just about tax policy—they’re about driving economic growth. According to Rice University’s Baker Institute study, a strong R&D credit program could create over 113,000 jobs in Texas by 2035 and generate more than $13 billion in economic activity, including a 0.25% boost in total investment in the first year alone.

These numbers show why Texas lawmakers are prioritizing R&D incentives, even with budget pressures. The state is betting that stronger R&D credits will attract more innovative companies and encourage existing businesses to expand their research activities in Texas.

Actionable Steps for Your Business

For Companies Currently Claiming the Texas R&D Credit:

  1. Model how the higher credit rate will affect your tax planning
  2. Review your R&D documentation to ensure it meets federal standards

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

  1. Check your eligibility under the new rules
  2. Estimate your potential savings using the new 8.722% rate
  3. Consider the timing of your R&D spending
  4. Evaluate Texas as a location for expanding your R&D activities

For All Businesses:

  1. Work with industry groups to advocate for permanent program status
  2. Get your R&D tracking systems ready for federal alignment
  3. Consult tax professionals who understand both federal and Texas R&D credit rules

Looking Ahead: Timeline and Implementation

While Senate Bill 2206 has passed the Finance Committee, both bills still need approval from their respective chambers and the governor’s signature. With strong bipartisan support and clear economic benefits, passage looks likely—but businesses should keep a close eye on the legislative process.

If passed, the new program would operate under a separate legal structure (Subchapter T), signaling a fresh start rather than a tweak to existing rules.

The Bottom Line

With these proposed changes, Texas is making itself even more attractive for R&D investment. The combination of federal alignment, higher credit rates, and program extension offers a compelling package for innovative companies.

But success will depend on careful planning and execution. Now is the time for companies to prepare—whether that means updating documentation, recalculating benefits, or considering Texas for expanded R&D operations.

The message from Austin is clear: Texas wants to be your R&D hub. The real question is, are you ready to take advantage of these enhanced incentives?

Frequently Asked Questions

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

The credit rate would rise from 5% to 8.722% of qualified expenses—a 74% increase. For example, a company with $500,000 in qualified R&D expenses would see its credit go from $25,000 to about $43,610. If you work with a Texas higher education institution, the rate jumps to 10.903%.

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

With the new alignment, documentation that meets federal R&D credit standards should also satisfy Texas requirements, making compliance easier.

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 resolve technical uncertainty when 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 especially valuable for growing companies making significant R&D investments.

The current legislation doesn’t set a cap on credits, but this could change as the bills move through the process. Businesses should stay updated on any developments.

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