The Research and Development (R&D) Tax Credit offered in Texas, currently defined and governed by Chapter 171 – Subchapter M, is set to undergo significant changes beginning next year. This transformation follows the approval of Bill SB 2206 by the Texas Senate and its subsequent signing by the Governor.
The updates to the R&D Tax Credit will extend its applicability and align it more closely with federal R&D tax credit definitions and methodologies. Notably, the modifications will increase the rate of the tax credit, thereby enhancing the potential credit valuation for qualifying entities.
These changes are scheduled to take effect on January 1, 2026. Importantly, the new legislation will repeal Section 151.3182, which provides a sales and uses tax exemption for the purchase, lease, rental, storage, or use of depreciable tangible personal property directly utilized in qualified research activities. Additionally, Subchapter M of Chapter 171, which currently governs the tax credit for R&D endeavors, will also be repealed.
The significant changes involve updates to the credit rates, qualifying activities, and the termination of previously authorized credits:
Subchapter M (Current) vs. Subchapter T (Updated)
Eligible Entities
- No changes between the current and updated versions.
Credit Rate (General Rule)
- Current (Subchapter M):
- 5% of the taxpayer’s additional Qualified Research Expenses (QREs) over the base amount.
- 2.5% if the taxpayer had no QREs in one or more of the three preceding tax periods.
- Updated (Subchapter T):
- 8.722% of additional QREs over the base amount.
- 4.361% if no QREs in one or more of the three preceding tax periods.
Credit Rate (With University Collaboration)
- Current:
- 6.25% of additional QREs.
- 3.125% if no QREs in one or more of the three preceding tax periods.
- Updated:
- 10.903% of additional QREs.
- 5.451% if no QREs in one or more of the three preceding tax periods.
Research or Experimental Expenditures
- Current: Defined by IRC §41, limited to research conducted in Texas.
- Updated: Based on Line 48 of IRS Form 6765, limited to research conducted in Texas.
Refundability
- Current: Not refundable.
- Updated: Still not refundable, except for entities not required to pay Franchise Tax during the period.
Annual Cap (Per Employer and Global)
- No cap in either version.
Expiration
- Current: Expires December 31, 2026.
- Updated: No expiration date mentioned
However, it’s essential to note that despite these changes, the other aspects, definitions and procedures existing in the current credit will not be altered. Furthermore, these changes won’t affect unused credits that taxable entities were allowed to carry forward under the old rules. This means entities can still apply those existing credits in their reports until the expiration date set by the previous incentives.
Looking ahead, the revised credit system in Texas will take effect on January 1, 2026. To prepare for this major change, the Texas Comptroller’s office is creating the necessary forms, detailed instructions, and administrative procedures to manage the new credit regulations effectively. For this reason, staying up to date on these developments will be crucial for understanding the full impact of these changes.