In May and June 2025, Texas Gov. Greg Abbott signed legislation enacting a new research and development (R&D) tax credit and making various franchise tax amendments. Specifically, on June 22, 2025, Texas enacted a new R&D credit that taxpayers may take against the Texas franchise tax that replaces the existing R&D franchise tax credit and the sales tax exemption, both of which were set to expire on Dec. 31, 2026.1 Previously, on June 20, 2025, Governor Abbott signed separate legislation concerning the computation of cost of goods sold (COGS) for radio broadcasters.2 Also, on May 24, 2025, Texas enacted legislation expanding the definition of “retail trade” to include certain uniform rental services.3
R&D credit
Effective Jan. 1, 2026, Texas law now provides for a permanent R&D credit that may be taken against franchise tax.4 The amount of the new Texas credit is based on a percentage of the federal qualified research expense for research conducted in Texas.
Qualified research expense
A “qualified research expense” is defined as the portion of the amount reported by a taxable entity as its total qualified research expenses on line 48 of federal Form 6765, Credit for Increasing Research Activities, attributable to research conducted in Texas.5 Notably, the law provides for rolling conformity to the Internal Revenue Code (IRC) and applicable federal regulations and other federal guidance limited to the extent applicable in determining line 48.6 The term excludes amounts that are not paid or incurred by the taxable entity, a member of the entity’s combined group, or a lower-tier entity. For purposes of determining the amount on line 48 for the Texas credit, a taxable entity or the Texas Comptroller of Public Accounts may use statistical sampling procedures if permitted under the Internal Revenue Service’s Revenue Procedure 2011-42 or a successor publication.7 Expenses for supplies properly reportable by a taxable entity as qualified research expenses may not be excluded from the computation of those expenses for purposes of the Texas credit on the basis that the supplies are taxable, nontaxable, or exempt from sales and use tax.8
Credit amount and application
In general, the credit amount equals 8.722% of the difference between (i) the qualified research expenses incurred during the period on which the report is based and (ii) 50% of the average amount of qualified research expenses incurred during the three tax periods before the period on which the report is based.9 If the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 4.361% of the qualified research expenses incurred during that period.10 The total credit claimed for a report, including the amount of any carryforward, may not exceed 50% of the amount of tax due for the report before any applicable tax credits.11 A taxable entity must apply for the credit on or with the report for the period for which the credit is claimed.12
Refundable credit if no tax due
If a taxable entity incurs qualified research expenses during a period for which the entity is not required to pay franchise tax, the entity may receive the amount as a refundable credit.13 In determining the amount of the credit that may be refunded, the 50% of tax due limitation discussed above does not apply.14 A taxable entity must apply for the credit on or with the report for the period for which the credit is claimed or, if the entity does not file a report for the applicable period, on a form adopted by the Comptroller.15
Combined reporting
The credit for qualified research expenses incurred by a member of a combined group must be claimed on the combined report, and the combined group is considered the taxable entity for purposes of the credit.16 An upper-tier entity that includes the total revenue of a lower-tier entity for purposes of computing its taxable margin may claim the credit for qualified research expenses incurred by the lower-tier entity to the extent of the upper-tier’s ownership interest in the lower-tier entity.17
Carryforward allowed; assignment prohibited
If a taxable entity is eligible for a credit that exceeds the 50% of tax due limitation discussed above, the entity may carry the unused credit forward for up to 20 consecutive reports.18 Credits, including credit carryforwards, are considered used in the following order: (i) a credit carryforward of unused R&D credits that were accrued prior to the credit’s repeal on Jan. 1, 2008, and which will expire no later than Dec. 31, 2027; (ii) a credit carryforward of unused R&D credits that were accrued prior to the former credit’s repeal on Jan. 1, 2026; (iii) a credit carryforward under the new R&D credit provisions; and (iv) a current year credit.19
A taxable entity may not convey, assign, or transfer the R&D credit to another entity unless substantially all the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.20
Amended reports
A taxable entity must file an amended Texas franchise tax report if: (i) the taxable margin of the taxable entity or the amount of qualified research expenses incurred by the taxable entity is changed as the result of an audit or other adjustment by the Internal Revenue Service; or (ii) the taxable entity files an amended federal income tax return or other return that changes the taxable margin of the taxable entity or the amount of qualified research expenses incurred by the taxable entity.21
Repeal of existing sales tax exemption and franchise tax credit
Effective Jan. 1, 2026, the legislation expressly repeals the existing sales tax exemption for property used in R&D activities22 and the existing R&D credit that may be taken against franchise tax23 that were set to expire on Dec. 31, 2026.24
The legislation clarifies that the repeal of the sales tax exemption does not affect tax liability accruing before Jan. 1, 2026.25 Also, the repeal of the existing R&D franchise tax credit does not affect an unused credit a taxable entity was authorized to carry forward under prior law, so a taxable entity may continue to apply those credits until they would have expired under the existing R&D credit provisions had such provisions remained in effect.
The new R&D credit applies only to a report originally due on or after Jan. 1, 2026.26 A taxable entity is not eligible for and may not claim the new R&D credit if the taxable entity, or a member of the taxable entity’s combined group, received a sales tax exemption for property used in R&D activities during the period for which the report is based.
Radio broadcasters
Effective June 20, 2025, legislation amends the statute relating to the computation of COGS by television and radio broadcasters.27 The legislation clarifies that certain existing franchise tax provisions applicable to broadcasting apply not only to free, over-the-air, local television broadcasters licensed by the Federal Communications Commission (FCC), but also to similarly situated, free, over-the-air, local FCC-licensed radio broadcasters. This clarification is consistent with current provisions applicable to broadcasting and “live and prerecorded television and radio programs,” that FCC-licensed radio broadcasters may take COGS into consideration when calculating franchise tax liability, ensuring franchise tax consistency between radio and television broadcasters.28
Uniform rentals
Applicable to Texas franchise tax reports filed on or after Jan. 1, 2027, the definition of “retail trade” is expanded to include activities involving the rental of industrial uniforms, industrial garments, and industrial linen supplies classified as Industry 7213 or 7218 of the 1987 Standard Industrial Classification Manual.29 Under existing law, these activities do not qualify as retail activities, which can restrict the ability of companies performing these activities from obtaining the reduced retail/wholesale franchise tax rate of 0.375% instead of the general state franchise tax rate of 0.75%.30
Commentary
The legislation enacting a new permanent R&D tax credit is a welcome development for many businesses in Texas. Under existing law, taxpayers could claim either a franchise tax credit for certain R&D activities or a sales and use tax exemption for certain property used in R&D activities that was similar to the federal income tax credit for certain research activities; however, the state exemption and credit were scheduled to expire on Dec. 31, 2026. The recent legislation is intended to keep Texas competitive in R&D activities and encourage new investments in the state by permanently extending the franchise tax credit beyond its expiration date and by making administration of the credit more efficient for taxpayers and the Comptroller by mirroring the federal R&D credit.31
Under existing law, Texas conformed to the IRC as of Dec. 31, 2011, for purposes of the R&D credit which limited eligibility and created significant challenges for taxpayers and the Comptroller. For example, under existing law, projects such as internal-use software may be ineligible for the Texas R&D credit despite being eligible for the federal credit. Also, subsequent changes in federal law or policy resulted in growing disparity when computing eligible expenses. The policy resulted in a significant number of R&D audits, which were often protracted and consumed significant resources. Rolling conformity to the federal credit should vastly streamline administration, particularly when considering the myriad of changes likely to result from enactment of the One Big Beautiful Bill Act,32 though challenges may still remain due to differences such as taxpayer grouping and carryforwards of pre-change credits.
The R&D credit is more generous because the percentages for determining the credit amount are increased. According to the Texas legislature’s fiscal note, this legislation is projected to lower state tax revenue by approximately $248 million for the two-year fiscal period ending Aug. 31, 2027, and $1.08 billion for the two-year fiscal period ending Aug. 31, 2029.33 Taxpayers interested in this credit should ensure that they comply with the credit requirements and watch for future regulations or other administrative guidance to be issued by the Comptroller.
The amendments relating to radio broadcasters and uniform rental companies are industry-specific and intended to clarify existing law or address disparities in the current law. Taxpayers in these industries should consider this legislation that provides tax relief in targeted areas.
1 S.B. 2206, Laws 2025.
2 S.B. 263, Laws 2025.
3 S.B. 2774, Laws 2025.
4 S.B. 2206, Laws 2025.
5 TEX. TAX CODE ANN. § 171.9202(a).
6 TEX. TAX CODE ANN. § 171.9202(c)(1).
7 TEX. TAX CODE ANN. § 171.9202(d)(1).
8 TEX. TAX CODE ANN. § 171.9202(d)(2).
9 TEX. TAX CODE ANN. § 171.9204(a). The percentage amount is 10.903% if the taxable entity contracts with one or more public or private institutions of higher education and incurs qualified research expenses under the contract. TEX. TAX CODE ANN. § 171.9204(b). Under the existing R&D credit, the general credit amount was 5% and the credit amount for taxable entities contracting with public or private institutions was 6.25%. Former TEX. TAX CODE ANN. § 171.654.
10 TEX. TAX CODE ANN. § 171.9204(c). The percentage amount is 5.451% if the taxable entity contracts with one or more public or private institutions of higher education and incurs qualified research expenses under the contract, but has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based. TEX. TAX CODE ANN. § 171.9204(d).
11 TEX. TAX CODE ANN. § 171.9207.
12 TEX. TAX CODE ANN. § 171.9210.
13 TEX. TAX CODE ANN. § 171.9205(a).
14 TEX. TAX CODE ANN. § 171.9205(b).
15 TEX. TAX CODE ANN. § 171.9205(c). The form must be submitted by the date a report for the period for which the credit is claimed would be due.
16 TEX. TAX CODE ANN. § 171.9206(a).
17 TEX. TAX CODE ANN. § 171.9206(b).
18 TEX. TAX CODE ANN. § 171.9208(a).
19 TEX. TAX CODE ANN. § 171.9208(b).
20 TEX. TAX CODE ANN. § 171.9209.
21 TEX. TAX CODE ANN. § 171.212(a).
22 TEX. TAX CODE ANN. § 151.3182.
23 TEX. TAX CODE ANN. §§ 171.651–171.665.
24 S.B. 2206, § 3.
25 S.B. 2206, § 4.
26 S.B. 2206, § 5.
27 S.B. 263, amending TEX. TAX CODE ANN. § 171.1012(o).
28 Bill Analysis for S.B. 263, Texas Senate Research Center, June 2, 2025.
29 S.B. 2774, amending TEX. TAX CODE ANN. § 171.0001(12).
30 This will allow certain businesses that functionally operate like retailers to obtain the lower retail tax rate although they rent, rather than sell, their goods. Bill Analysis for S.B. 2774, Texas Senate Research Center, June 11, 2025.
31 Bill Analysis for S.B. 2206, Texas House Ways & Means Committee Report.
32 P.L. 119-21.
33 Fiscal Note for S.B. 2206, Texas Legislative Budget Board, May 10, 2025.
Contacts:
Content disclaimer
This Grant Thornton Advisors LLC content provides information and comments on current issues and developments. It is not a comprehensive analysis of the subject matter covered. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this content.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
For additional information on topics covered in this content, contact a Grant Thornton Advisors LLC professional.
Tax professional standards statement
This content supports Grant Thornton Advisors LLC’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. If you are interested in the topics presented herein, we encourage you to contact a Grant Thornton Advisors LLC tax professional. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal, tax, or professional advice provided by Grant Thornton Advisors LLC. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact a Grant Thornton Advisors LLC tax professional prior to taking any action based upon this information.
Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton Advisors LLC assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
Grant Thornton Advisors LLC and its subsidiary entities are not licensed CPA firms.
Trending topics
Share with your network
Share