Texas R&D Credit: Senate Bill 2206 Created Most Competitive Rate

The Texas R&D credit transformed in June 2025 when Governor Abbott signed Senate Bill 2206, permanently extending the program and increasing the franchise tax credit rate from 5% to 8.722%—with an even higher 10.903% rate available for companies partnering with Texas universities, making it one of America’s most generous state R&D incentives.

Key Takeaways

• Senate Bill 2206 (signed June 22, 2025) increased the Texas franchise tax credit from 5% to 8.722%—a 74% increase—effective for reports due on or after January 1, 2026
• Companies partnering with Texas higher education institutions qualify for a 10.903% credit rate, up from the previous 6.25%
• The program is now permanent with no expiration date (the previous December 31, 2026 sunset was eliminated)
• Texas aligned its definition of qualified research expenses with Line 48 of IRS Form 6765, simplifying compliance and documentation
• The sales and use tax exemption for R&D equipment was repealed effective January 1, 2026, replaced by the enhanced franchise tax credit
• Credits may be refundable for certain veteran-owned businesses and low-revenue entities that owe no franchise tax
• Texas follows federal audit outcomes for credit calculations, reducing state-level disputes and providing clearer guidance

What Changed in 2025 That Makes Texas Unbeatable

Let me tell you what actually happened because most business owners don’t realize the magnitude of this change. On June 1, 2025, the Texas Legislature passed Senate Bill 2206. Governor Abbott signed it on June 22. This wasn’t a minor tweak—this fundamentally restructured how Texas rewards research and development.

The old credit was set to expire December 31, 2026. Every company conducting R&D in Texas faced uncertainty. Do we keep investing here? Do we move projects to states with permanent programs? That uncertainty killed long-term planning.

Senate Bill 2206 made the credit permanent. No expiration date. No sunset provision. Texas committed to supporting R&D indefinitely. That single change shifted the entire calculation for companies deciding where to locate research facilities.

Then they increased the rate. The standard credit jumped from 5% to 8.722%. That’s a 74% increase. A company spending $1 million on qualified research in Texas previously got $50,000. Now they get $87,220. Same research. Same expenses. Almost double the credit.

The university partnership rate matters even more. Companies contracting with Texas public or private universities get 10.903% instead of 8.722%. If you’re spending $2 million on research with UT Austin, Texas A&M, Rice, or any Texas higher education institution, you’re getting $218,060 in credits instead of the previous $125,000. That difference funds additional research cycles.

The Sales Tax Exemption Trade-Off

Texas used to let companies choose between a franchise tax credit or a sales tax exemption on R&D equipment purchases. Senate Bill 2206 eliminated that choice. Effective January 1, 2026, the sales tax exemption disappears. You can only claim the franchise tax credit.

For most companies, this works better. The enhanced credit rate outweighs the lost sales tax exemption. A semiconductor manufacturer in Austin buying $500,000 in R&D equipment used to save about $41,250 in sales tax (8.25% rate). Under the new system, if that equipment cost is part of their overall qualified research expenses, they’re getting credits on the entire project—not just equipment purchases.

The alignment with federal Form 6765 Line 48 changed everything about compliance. Texas now uses the same definition of qualified research expenses as the IRS. One set of documentation. One calculation methodology. If the IRS accepts your QREs, Texas accepts them too. This eliminated years of state-level audits arguing about what qualifies.

Program Feature	Before SB 2206 (2024)	After SB 2206 (2026 forward)
Standard credit rate	5% of QREs	8.722% of QREs
University partnership rate	6.25% of QREs	10.903% of QREs
Program expiration	December 31, 2026	Permanent (no expiration)
Sales tax exemption option	Available (choose credit or exemption)	Eliminated January 1, 2026
QRE definition	Texas-specific rules	Tied to IRS Form 6765 Line 48
Refundability	Non-refundable	Refundable for veteran-owned and certain low-revenue entities
Credit cap per year	50% of franchise tax liability	50% of franchise tax liability (unchanged)
Carryforward period	20 years	20 years (unchanged)

Texas Industries Positioned to Benefit Most

Semiconductors lead the way. Texas exports more semiconductors than any other state—36% of total U.S. semiconductor manufacturing capacity sits in Texas. Samsung invested $17 billion in their Taylor facility. Texas Instruments pioneered the integrated circuit in Dallas. The University of North Texas just launched a semiconductor research center focused on next-generation materials.

Governor Abbott appointed the inaugural members of the Texas Semiconductor Innovation Consortium in March to secure Texas’s leadership position. The North Texas region continues expanding with new manufacturing and design facilities. All of this generates massive qualified research expenses eligible for the enhanced credit.

A semiconductor manufacturer in Austin working with an R&D advisory firm identified $2.8 million in qualifying expenses over two years under the old program. At 5%, that generated $140,000 in credits. Under the new 8.722% rate, the same activities generate $244,216. If they partner with UT Austin’s semiconductor research program, the rate jumps to 10.903%—that’s $305,284 in credits on the same expenses.

Advanced manufacturing comes second. Texas contributes $250 billion annually to GDP through manufacturing—about 13% of the state’s total economic output. The sector employs over 900,000 people. We’re talking robotics, AI-driven automation, IoT sensor integration, digital twins, collaborative robots working alongside humans.

Apple announced a 250,000-square-foot AI server manufacturing plant in Houston opening by 2026. Nvidia is building AI supercomputer facilities in both Houston and Dallas. These aren’t traditional manufacturing operations. They’re developing new production techniques, testing advanced materials, solving complex engineering challenges. All qualifying research.

Life sciences exploded in North Texas over the past year. The region hosted the Texas Life Science Forum in November 2025 featuring 48 emerging companies across therapeutics, medical devices, diagnostics, and digital health. Collectively, participating ventures raised over $650 million. The focus areas—personalized medicine, AI integration in drug discovery, biomanufacturing innovation using 3D printing of biological materials—all involve systematic experimentation to eliminate technical uncertainty.

Jennifer Rabb, president of the Texas Taxpayers and Research Association, explained it perfectly: “R&D is so important to a healthy economy. And without an extension of the credit, companies are going to choose to go elsewhere for those projects.”

The Four-Part Test for Texas Companies

Your research must meet four requirements under IRC Section 41. Texas now follows federal standards exactly, so these criteria determine both your federal and state eligibility.

First test: permitted purpose. You’re developing or improving a business component—a product, process, computer software, technique, formula, or invention you’ll use in your trade or business. An energy company testing new hydrogen storage methods qualifies. A medical device manufacturer in Houston improving surgical instruments qualifies. A software company in Austin building AI-driven analytics platforms qualifies.

Second test: technical uncertainty exists. You face real questions about capability, methodology, or appropriate design. You don’t know if your approach will succeed. You don’t know how to achieve the required performance. You don’t know which design alternative performs best. Market uncertainty about customer demand doesn’t count. Technical uncertainty about making something work does count.

Third test: process of experimentation. You systematically evaluate alternatives to eliminate uncertainty. Testing different materials. Running simulations. Building prototypes. Collecting and analyzing data. A semiconductor fab in Taylor testing different etching processes follows a process of experimentation. A pharmaceutical company in Dallas running compound screening assays follows a process of experimentation.

Fourth test: technological in nature. Your work relies on hard sciences—engineering, physics, chemistry, biology, computer science. Market research doesn’t qualify. Management consulting doesn’t qualify. Aesthetic improvements without functional changes don’t qualify.

How the Calculation Actually Works

The Texas franchise tax credit equals 8.722% of the difference between your current year qualified research expenses and 50% of your average QREs from the prior three years. This matches the federal alternative simplified credit methodology, making calculations straightforward.

Let’s walk through a real example. A biotech company in Dallas spent $1.5 million on qualifying research in 2026. Their QREs for the previous three years averaged $800,000 annually. Here’s the math:

Current year QREs: $1,500,000. Base amount (50% of three-year average): $400,000. Incremental QREs: $1,100,000. Texas credit at 8.722%: $95,942.

If that same company contracts with UT Southwestern Medical Center for part of their research, qualifying expenses under that contract get the 10.903% rate instead. Assume $600,000 of their $1,500,000 in QREs comes from the university partnership. The remaining $900,000 gets the standard rate.

University-related incremental QREs calculation gets complex because you need to track base amounts separately. But the rate difference matters substantially. On $600,000 in university partnership expenses above base, the difference between 8.722% and 10.903% is roughly $13,000 additional credit.

Credits are capped at 50% of your franchise tax liability for the year. If your company owes $150,000 in franchise tax, you can use up to $75,000 in R&D credits. Unused credits carry forward for 20 years. That carryforward provision means even companies with low current tax liability eventually benefit as they grow.

The refundability provision for certain entities matters for startups. New veteran-owned businesses and specific low-revenue entities that owe no franchise tax may receive refunds instead of carryforwards. Check with the Texas Comptroller for specific qualification requirements since this provision has detailed rules.

Federal Credit Stacks With State Credit

You claim both federal and Texas credits on the same qualified research expenses. There’s no prohibition against double-dipping. The federal credit provides 6-14% depending on your calculation method. The Texas credit adds another 8.722% or 10.903%. Combined, you’re getting 15-25% of your qualifying research expenses back through tax incentives.

A manufacturing company in Fort Worth with $2 million in QREs claims approximately $280,000 in federal credits using the alternative simplified method (14% rate). They also claim $174,440 in Texas franchise tax credits (8.722% rate). Total benefit: $454,440 on the same $2 million in research spending. That’s real money funding additional innovation cycles.

Five Critical Steps for Maximizing Your Texas R&D Credit

1. Document everything as it happens, not at tax time – The alignment with federal Form 6765 means your documentation strategy should target IRS standards from day one. Project initiation documents describing technical goals and uncertainties. Weekly status updates showing problems encountered and solutions tested. Design review presentations documenting iteration cycles. Email threads where engineers discuss technical challenges. Contemporary records survive audits. Reconstructed records fail audits.
2. Separate Texas QREs from out-of-state research – The Texas credit only applies to qualified research conducted within Texas borders. If your company operates multi-state operations, track employee time, lab locations, and testing facilities by state. A software company with developers in Austin and Seattle needs documentation showing which work happened in Texas versus Washington.
3. Identify university partnership opportunities – The 10.903% rate requires contracting with Texas public or private higher education institutions. This doesn’t mean informal collaboration. You need actual contracts where you incur qualified research expenses under those agreements. Reach out to university technology transfer offices. Many Texas universities actively seek industry research partnerships and understand the credit mechanics.
4. Plan for the sales tax exemption elimination – If you currently use the R&D sales tax exemption, prepare for the January 1, 2026 transition. Equipment purchases after that date won’t qualify for sales tax exemption. They will count as QREs for the enhanced franchise tax credit if they meet IRC Section 41 requirements. Run the numbers to understand your total benefit under the new system versus the old system.
5. Coordinate Texas credit with federal filing – Since Texas ties to Line 48 of Form 6765, file your federal R&D credit first. Use the federal calculation as the foundation for your Texas franchise tax credit claim. This simplification means less paperwork and reduced audit risk compared to maintaining separate state-specific calculations.

Documentation Requirements Under the New System

Texas adopted federal standards for qualified research expenses. This means IRS audit outcomes now determine Texas credit calculations. If the IRS accepts your QREs during a federal audit, Texas accepts them. If the IRS disallows certain expenses, Texas follows that determination.

This creates both opportunities and risks. The opportunity: you’re building one documentation package that satisfies both federal and state requirements. The risk: weak federal documentation kills both your federal and Texas credits simultaneously.

Start with project documentation proving the four-part test. What business component were you improving? What technical uncertainty did you face? What experimentation process did you follow? What hard sciences did you apply? Document these elements at project kickoff, not when filing taxes.

Track employee time meticulously. Which employees worked on qualifying activities? How many hours did each person spend? Texas companies need this detail for both federal and state claims. Time tracking systems with project codes work perfectly. Detailed timesheets showing R&D versus non-R&D work succeed. Year-end percentage estimates fail audits.

Maintain supply and equipment records. What materials did you consume during research? What equipment did you purchase specifically for qualifying projects? Texas no longer offers sales tax exemption on this equipment starting January 1, 2026, but the costs still count as QREs for the franchise tax credit. Keep purchase orders, invoices, and internal requisitions connecting supplies to specific projects.

Form 6765 Section G now requires additional detail for most federal claims. You identify specific business components. You document uncertainties you faced. You describe experimentation processes. Texas adopts whatever information you provide to the IRS. Strong Section G documentation protects both federal and state credits.

Expense Category	Qualifies as QRE?	Key Documentation Needed
Wages for engineers and scientists conducting research	Yes	Timesheets with project codes, job descriptions, project assignment records
Supplies consumed in R&D testing	Yes	Purchase orders, invoices, internal requisitions tied to projects
Contract research with third parties	Yes (65% of payments)	Contracts specifying R&D scope, payment records, deliverable documentation
Equipment purchases for R&D	Maybe (depends on IRC Section 174 treatment)	Equipment specifications, usage logs, depreciation records
University research contracts	Yes (qualifies for 10.903% rate)	Written contracts with Texas higher education institutions, payment records, research reports
Market research and surveys	No	N/A – does not qualify

How This Impacts Different Texas Business Structures

The Texas franchise tax applies to most business entities doing business in Texas—corporations, LLCs, partnerships, professional associations, trusts, business trusts. Sole proprietorships and general partnerships without limited partners are exempt from franchise tax and therefore can’t claim the franchise tax credit. Those entities can still claim federal R&D credits.

Pass-through entities like S-corporations and partnerships pay franchise tax at the entity level. The R&D credit reduces that franchise tax liability. Unlike some states where credits pass through to owners, the Texas credit stays at the entity level.

C-corporations pay franchise tax and claim the credit directly. The 50% limitation means you can use credits up to half your franchise tax liability in any given year. Unused credits carry forward for 20 years.

Companies structured as limited partnerships or LLCs taxed as partnerships need to evaluate their franchise tax exposure. Texas uses a margin-based franchise tax with different calculation methods. Some companies with low margins pay minimal franchise tax, limiting credit usability. The 20-year carryforward helps ensure eventual benefit as companies grow.

The University Partnership Opportunity

That 10.903% rate for university partnerships deserves serious attention. Texas has world-class research universities across multiple disciplines. UT Austin ranks among the top engineering schools. Texas A&M leads in agricultural and energy research. Rice University excels in nanotechnology and materials science. UT Southwestern in Dallas dominates medical research. The University of Houston focuses on energy and advanced manufacturing.

These institutions actively seek industry research partnerships. They have technology transfer offices specifically designed to facilitate collaborations. A biotech company partnering with UT Southwestern on drug development research qualifies. A semiconductor manufacturer contracting with UT Austin’s microelectronics research center qualifies. An energy company working with Texas A&M on carbon capture technology qualifies.

The research must meet the four-part test. The university partnership provides access to specialized equipment, expert faculty, and graduate student researchers. But you’re still solving business problems with technical uncertainty through systematic experimentation. Document the contract, track the expenses, and claim the higher 10.903% rate.

Why Professional R&D Tax Credit Firms Matter More Than Ever

Senate Bill 2206 simplified some aspects of the Texas credit by aligning with federal standards. It also created new complexities around university partnerships, the sales tax exemption transition, and refundability provisions. Most general practice CPAs lack specialized expertise in R&D credit calculations and documentation.

Professional R&D tax credit firms employ both engineers and tax specialists. The engineer evaluates your technical activities against the four-part test. They interview your staff, review project documentation, and identify qualifying work your team doesn’t recognize as research. The tax specialist calculates credits using proper methodology and prepares documentation structured to survive IRS and Texas Comptroller scrutiny.

This combination matters tremendously now that Texas follows federal audit outcomes. Weak federal documentation doesn’t just reduce your federal credit—it eliminates your Texas credit too. Professional firms build documentation packages that withstand examination from both authorities.

Most R&D firms work on contingency. You pay a percentage of credits they identify. If they find nothing qualifying, you pay nothing. This makes professional help accessible even to smaller Texas companies worried about upfront costs.

A medical device company in San Antonio worked with an R&D specialist and claimed $410,000 in combined federal and Texas credits for three years they hadn’t previously claimed. They were developing implantable sensors and testing biocompatible materials but didn’t realize this work qualified. The firm documented everything properly, filed amended federal returns and Texas franchise tax reports, and generated refund checks.

What Texas Business Owners Should Do Right Now

Calculate your potential benefit under the new rates. Take your 2024 or 2023 qualified research expenses. Multiply by 8.722%. That’s your approximate Texas credit for similar activity levels going forward. If you partner with Texas universities, calculate 10.903% on those partnership expenses. Add your federal credit. Look at the total cash benefit available for continuing your current R&D activities.

Set up documentation systems today. Don’t wait for the January 1, 2026 effective date. Start capturing project initiation documents, technical meeting notes, test results, and design iterations now. When you file franchise tax reports for periods after January 1, 2026, you’ll have organized documentation ready.

Review your university relationships. Are you currently collaborating informally with Texas research institutions? Formalize those relationships with written contracts that document research scope, deliverables, and costs. That paperwork unlocks the higher 10.903% rate.

Plan your equipment purchases carefully around the January 1, 2026 transition. Equipment bought before that date can use the sales tax exemption. Equipment bought after that date gets included in QREs for the enhanced franchise tax credit. Run the numbers both ways to understand which approach generates maximum benefit.

Consider working with an R&D tax credit specialist for a preliminary assessment. Many firms offer free evaluations where they review your activities and provide ballpark estimates of potential credits. That information helps you decide whether pursuing credits makes financial sense and what documentation improvements you need.

Texas made a massive commitment to research and development with Senate Bill 2206. The permanent extension removes uncertainty. The rate increases reward innovation substantially. The alignment with federal standards simplifies compliance. The university partnership provision encourages collaboration between industry and academia.

Companies conducting qualifying research in Texas now access one of the nation’s most competitive state R&D incentive programs. Combined with federal credits, the total benefit can offset 15-25% of research costs. That’s real money that funds additional innovation cycles, hires more research staff, and accelerates product development timelines.

Take advantage of what Texas offers. Document your qualifying activities properly. Claim the credits you’ve earned. Use the savings to push your research even further. Texas designed this program to keep innovative companies here and attract new ones. Make it work for your business.

Texas R&D Credit FAQs

R&D Tax Credits by State

Citations

• Texas Policy Research – SB 2206 – 89th Legislature
• Engineered Tax Services – Texas Senate Advances R&D Tax Credit Bill
• Office of the Texas Governor – Governor Abbott Proclaims 2025 Manufacturing Week In Texas
• Robert Walters – Trends Shaping the Growing Manufacturing Industry in Texas in 2025
• TxEDC – Advanced Manufacturing in Texas
• Dean, Draper & Associates – Manufacturing Trends for 2026: Texas at the Center of Change
• Catapult Strategic Group – Full Force Innovation: Advancing Breakthroughs in Life Sciences for North Texas 2025
• University of North Texas – UNT launches new research center on next-generation semiconductors
• YTexas – The Building Blocks of Texas’s Future: Industry, Innovation and Workforce
• Rice University – Texas Life Science Forum showcases medtech, biotech and health care innovation
• Texas Legislature – SB 2206 Bill Analysis