Texas Extends Incentives for Research & Development Activities

On June 17, Governor Abbott signed into law Texas Senate Bill 2206 (S.B. 2206), extending the Research and Development (R&D) Credit, which currently expires December 31, 2026.  The changes to the credit will be effective January 1, 2026, aligning Texas R&D rules more closely with the federal R&D credit and increasing the credit rate from 5% to 8.722%. An increased credit of 10.903% is available if the research is performed in collaboration with public or private institutions of higher education.

Notably, S.B. 2206 allows for the use of statistical sampling in determining qualified research expenditures (“QREs”), provided the methodology aligns with IRS Revenue Procedure 2011-42 or its successor publications.  This is a welcome addition, as the use of statistical sampling to conduct R&D studies has been a point of contention in Texas audits.

Under current law, taxpayers must choose to apply the R&D credit towards either:

1. a sales and use tax exemption on the purchase, sale, lease, rental, storage, or use of qualified research property; or
2. the Franchise Tax Credit.

S.B. 2206 repeals the sales tax exemption portion of the R&D credit and makes the R&D credit applicable against franchise taxes. Certain taxpayers that are not required to pay franchise tax may be entitled to a refundable credit.

To learn how S.B. 2206 could benefit your business, contact CTI today. We’re here to help you navigate the details and capture the full value of Texas R&D incentives.