Beginning Jan. 1, 2026, Texas businesses can benefit from significant changes to the state’s research and development (R&D) tax credit program as a result of Senate Bill 2206 (SB 2206), which includes higher rates, simplified compliance and new refund options for small and veteran-owned businesses. 

Let’s review the key changes and how businesses in Texas may want to rethink their tax strategies, budget differently for equipment purchases and align research activities with the new rules to maximize R&D tax credit benefits.

Simplified R&D Tax Credits, Higher Rates – Made Permanent

Under the new framework, companies will no longer be able to claim both the franchise tax credit and sales tax exemption for R&D equipment. Instead, the incentives are being consolidated and enhanced, increasing the base franchise tax credit from 5% to 8.722% of qualified research expenses, and to 10.903% for R&D work with state higher education institutions – up to 74% more savings on eligible research. What’s more, the bill makes the credit permanent, allowing for better long-term R&D planning.

More Refund Eligibility

Entities such as start-ups, small businesses and veteran-owned businesses with little to no franchise tax liability can receive their R&D tax credit as a cash refund rather than having to carry credits forward if no tax is owed.

Streamlined Treatment of Qualified Research Expenses

SB 2206 aligns Texas’ R&D program protocol more closely with federal law, streamlining recordkeeping and minimizing audit risk. For research conducted in Texas, qualifying expenses are now directly tied to IRS Form 6765.

What Didn’t Change

• The R&D credit is still limited to 50% of a taxpayer’s franchise tax liability (pre-credit).
• The carry-forward period for unused credit remains the same at up to 20 years.
• The credit is still nontransferable, i.e., cannot be sold or assigned.
• Depreciable property remains excluded, but note that supplies must be included even if exempt from Texas sales tax.

Planning Considerations

• Remember that the new rules apply to tax years beginning on or after Jan. 1, 2026, and businesses using the sales tax exemption in 2025 can’t claim the new credit for that same period.
• Keep in mind, the elimination of the sales tax exemption will result in higher R&D equipment costs up front, to be offset with the credit later, so plan purchases accordingly.
• Consider ways to partner with universities to take advantage of the 10.903% credit rate.
• Note that credits from prior programs must be applied before using the new credit.
• Make sure your expenses and activities are robustly documented in light of the new program’s alignment with the federal Internal Revenue Code.

Turn to Doeren Mayhew’s Texas R&D tax pros to navigate these changes and maximize the benefits through proper planning.