Texas R&D Franchise Tax Credit

Texas R&D Franchise Tax Credit

Supports Texas companies through a state tax credit for eligible innovation spending to reduce commercialization costs.

The Texas Research and Development Franchise Tax Credit allows entities subject to the Texas franchise tax to claim a credit against their annual tax liability for qualifying research expenditures (QREs) conducted in Texas. Enacted under Senate Bill 2206 and effective January 1, 2026, the credit rate increased substantially from 5% to 8.722% for standard QREs and to 10.903% for R&D contracted to Texas public or private higher-education institutions. The credit is calculated on an incremental basis: it applies to the amount by which current-year Texas QREs exceed 50% of the average Texas QREs for the prior three tax years, mirroring the federal IRC Section 41 incremental calculation methodology. Unused credit carries forward for up to 20 years, providing value even in years with zero franchise-tax liability.

Eligibility is limited to taxable entities subject to the Texas franchise tax; sole proprietorships and most pass-through structures may not qualify depending on their franchise-tax filing status. QREs must be attributable to research physically conducted in Texas; the starting point is IRS Form 6765 Line 48 with a Texas-nexus filter applied. The prior sales and use tax exemption for R&D equipment is eliminated for periods on or after January 1, 2026 — the credit is the sole remaining Texas R&D incentive for franchise-tax filers. The university-contracted premium rate of 10.903% is available to any qualifying entity that contracts qualifying research activities to a Texas higher-education institution.

The credit is self-filed annually on the Texas Franchise Tax Report (Form 05-178); there is no competitive application, grant program, or agency review process. The filing deadline corresponds to each company's individual franchise-tax-report due date — typically May 15 for calendar-year filers. Companies in deep-tech sectors with significant Texas R&D headcount — biotech, semiconductor, AI infrastructure, advanced manufacturing, and medical devices — are primary beneficiaries given the incremental design's reward for sustained or growing R&D investment.