Tax insight

Texas legislation enhances R&D franchise tax credit, repeals R&D sales and use tax exemption

Insight
5 minute read
June 12, 2025

Update: The legislation (S.B. 2206) was signed by Governor Greg Abbott (R) on June 17.

What happened?

Texas legislation sent to Governor Greg Abbott (R) on June 1 provides for an enhanced research and development (R&D) franchise tax credit effective for reports originally due on or after January 1, 2026, with no expiration date. The legislation also repeals the sales and use tax exemption for certain property used in R&D activities under Texas Tax Code Sec. 151.3182 effective January 1, 2026.

[S.B. 2206, sent to Governor, 6/1/2025]

Why is it relevant?

The legislation raises the credit amount from 5% to 8.722%, links the definition of qualified research expense to line 48 of federal Form 6765, ties the credit to the federal law in effect for the federal year for which federal Form 6765 is filed, retains the 20-year carryforward, and provides for a refund of the credit in certain limited situations. Importantly, the legislation addresses recurring audit controversy around qualified research expenses, the treatment of IRS procedures and audits, standards of evidence, and statistical sampling.

Actions to consider

Taxpayers currently have the option of claiming either an R&D franchise tax credit or a sales and use tax exemption, although both were set to expire at the end of 2026. This legislation provides an opportunity for taxpayers to plan for R&D investments in Texas under a more favorable and predictable franchise tax credit regime.