Texas Gov. Greg Abbott signed Senate Bill 2206 in June 2025, which amended the state’s R&D tax credit incentive starting on Jan. 1, 2026.
The new legislation repealed the prior Sales and Use Tax Exemption for R&D equipment and replaced it with an enhanced tax credit.
The new bill aligned Texas R&D rules with the federal research and development tax credit and notably increased the credit rate from 5% to 8.722%. The amended framework is briefly described in this article.
Background
Starting in 2014, Taxpayers engaged in qualified research and development projects were able to claim either:
- 1) a sales and use tax exemption on the purchase, lease, rental, storage, or use of depreciable tangible personal property directly used in qualified research;
- 2) or a franchise tax credit based on qualified research expenses (QRE).
Qualified research for purposes of the credit was tied to IRC § 41, except that such expenses had to be for research conducted in Texas.
New Provision under Senate Bill 2206
The credit amount is 8.722% of the excess amount of qualified research expenses in the current period over the base amount (50% of the average of the previous three years).
In addition, the amount of the credit increased up to 10.903% for research contracts with institutions of higher education.
While the credit is capped at 50% of a taxable entity’s franchise tax liability, unused portions of the credit can be carried forward for up to 20 consecutive report years. The new bill specifically allows unused portions of the credit under the former statute to be carried forward until expired.
Accordingly, any unused credit amounts attributable to QRE prior January 1, 2026 must be used first when carrying over unused portions of the credit.
Taxpayer Implications
Certain taxpayers that are not required to pay franchise tax may be entitled to a refundable credit.
Contact Leyton to learn more about S.B. 2206 and how it could benefit your business. We’re happy to help you navigate the details and capture the full value of the R&D credit.
