On June 22, 2025, Texas Governor Greg Abbott signed SB 2206, which replaces the state’s existing research and development (R&D) tax incentives (a franchise tax credit and sales tax exemption) with a new and expanded franchise tax credit. The changes take effect on January 1, 2026.
Key Changes
Existing Provisions to Be Repealed
Since 2014, taxpayers engaged in qualified research can 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; or 2) a franchise tax credit based on qualified research expenses. Qualified research for purposes of the credit is tied to IRC § 41. Regulations adopted in 2021 (TAC 3.599) caused controversy in that they limited the credit as it related to internal-use software, created administrative burdens, and were applied retroactively to 2014. As of January 1, 2026, the sales-use tax exemption and credit are repealed.
New Credit
The amount of the new credit is 8.722% of the difference between the qualified research expenses incurred during the period on which the report is based and 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based. This marks an increase from the 5% allowed under the existing credit. In addition, the amount of the credit is increased for research contracts with institutions of higher education.
Qualified research expenses are tied to expenses reported by the taxable entity on line 48 of Internal Revenue Service (IRS) Form 6765 and that are attributable to Texas. “Tying the qualified research expenses to a number on a form eases compliance burdens for taxable entities claiming the credit, by eliminating the need for a factual determination of what expenses qualify,” said Brady Bryan, Principal at Ryan.
The legislation specifically provides that expenses for supplies properly reported by a taxable entity as qualified research expenses may not be excluded by the comptroller from the computation of the credit, based on whether such supplies are taxable or exempt under the state’s sales and use tax. This legislation overrides a provision in regulation TAC 3.699(b)(8)(A)(iii), which provides for such an exclusion.
The credit is capped at 50% of a taxable entity’s franchise tax liability, but unused portions of the credit can be carried forward for up to 20 years. Unused credit amounts attributable to the credit in its current (pre-2026) form must be used first when carrying over unused portions of the credit. The legislation specifically allows unused portions of the credit under the former statute to be carried forward until expired. In addition, the legislation does not impact liability for the sales-use tax accruing before January 1, 2026.
“The permanent increase in the credit amount, coupled with the federal law alignment to define the credit, is a game-changer that can make a huge difference for Texas businesses,” adds Bryan.
If your business claims the credit or sales tax exemption for qualified research expenses in Texas and you have questions about these changes, contact the experts at Ryan today.
TECHNICAL INFORMATION CONTACTS:
Brady Bryan
Principal
Ryan
213.627.1719
brady.bryan@ryan.com
Derek Gimbel
Manager
Ryan
202.621.7844
derek.gimbel@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.