Texas has no corporate income tax; its business tax is the franchise tax, and the research credit is a credit against it. The credit is based on qualified research expenses for research conducted in Texas, with a higher rate where the research is performed under contract with a Texas public university. Senate Bill 2206 (2025) replaced the credit with a new subchapter for reports due on or after 1 January 2026, so the rules depend on the report year.
Overview
| Item | Reports due before 2026 | Reports due on or after 1 January 2026 |
|---|---|---|
| Statute | Tax Code chapter 171, subchapter M | Tax Code chapter 171, subchapter T, enacted by Senate Bill 2206 (89th Legislature, 2025), which repealed subchapter M for reports due on or after January 1, 2026 |
| Rate | 5% of the excess of Texas QREs over 50% of the average Texas QREs for the three preceding periods; 2.5% of current QREs if there were no QREs in one of those periods | 8.722% of the excess over 50% of the three-period average; 4.361% where there were no QREs in one of the preceding periods |
| University research | 6.25% and 3.125% where the research is under contract with a Texas public institution of higher education | 10.903% and 5.451% |
| Alternative | Instead of the credit, a sales and use tax exemption for depreciable tangible property used in qualified research; an entity chose one or the other for a year | The sales tax exemption is repealed for purchases from 1 January 2026 |
| Limit | The credit may not exceed 50% of the franchise tax due before other credits | Same limit |
| Carryforward | 20 consecutive reports | Same |
| Refundable or transferable | No | From 2026, an entity that owes no franchise tax for a period can receive the credit as a refund; the 50 percent limit does not apply to that refund |
| Form | The credit is claimed with the franchise tax report on the Comptroller's prescribed form. | |
| Administering agency | Texas Comptroller of Public Accounts | |
Who can claim
Taxable entities subject to the franchise tax that incur qualified research expenses for research conducted in Texas. Senate Bill 2206 (89th Legislature, 2025) repealed Tax Code chapter 171 subchapter M and replaced it with subchapter T for franchise tax reports due on or after January 1, 2026. Texas QREs now follow current federal rules, based on the federal Form 6765 amounts attributable to research conducted in Texas. Combined groups compute the credit on a combined basis. There is no application; the credit is claimed on the report.
Rate and calculation
The Texas computation is a state version of the federal alternative simplified credit: current Texas QREs less half the average of the three preceding periods, multiplied by the rate. Texas QREs are federal QREs for research conducted in Texas. The 50% limit on the franchise tax due is applied after the credit is computed, with the unused balance carried forward.
Illustrative example. Brazos Semiconductors, a hypothetical company, has Texas QREs of US$4,000,000 in the period covered by its 2026 report and an average of US$3,000,000 for the three preceding periods, none of them with a university contract. Its franchise tax before credits is US$300,000.
| Step | Amount |
|---|---|
| 50% of the three-period average | US$1,500,000 |
| Excess QREs | US$2,500,000 |
| Credit at 8.722% | US$218,050 |
| Limit: 50% of US$300,000 | US$150,000 used on the 2026 report |
| Carried forward | US$68,050, for up to 20 reports |
How to claim
- Filter the federal workpapers for research conducted in Texas and identify any university contract research.
- Compute the three-period average of Texas QREs from prior reports.
- Complete the Comptroller's prescribed form and file it with the franchise tax report, due on 15 May, or on extension.
- Apply the 50% limit and record the carryforward.
- Keep the business component records; the Comptroller examines research credits and has issued rules on the substantiation it expects.
Amended reports can claim a credit within the Texas limitation period for refunds, generally four years from the due date.
Working with the federal claim
The state claim is built from the federal workpapers, not alongside them. Each business component in the Section G schedule carries a location, and the state qualified research expenses are the federal QREs for components, employees and contractors located in Texas. Two points of difference need their own working. The state base uses state figures, so prior-year Texas QREs and, where the method needs them, Texas gross receipts must be kept as a separate series from the federal ones. Where Texas adopts the Internal Revenue Code as of a fixed date, federal changes after that date, including the section 174 and 174A deduction rules, may not apply for Texas purposes, and the state deduction for research expenses may differ from the federal one.
Examinations are separate. The Comptroller of Public Accounts can examine the state credit under its own procedures and limitation period whether or not the IRS examines the federal claim, and it will ask for the same things: the business components, the evidence for each part of the four-part test, the basis of the wage allocations and the location of the work. A single set of records, organised by business component with a location field, answers both.
Common questions
Can we claim the Texas credit without claiming the federal credit? Yes, where the state computation stands on its own, although the definitions are federal and the workpapers are the same, so claiming one without the other is unusual.
Our researchers work remotely from several states. Which state's QREs are they? Wages are allocated by where the employee performs the research, so remote staff need location records as well as project time records. Work performed outside Texas is outside the Texas credit even if the employee is on Texas payroll.
Can an amended return add the Texas credit for a past year? Generally yes within the state refund period, which is noted above; elections that the state requires on the original return cannot be added later.
Does a state credit affect the federal payroll tax offset? No. The federal payroll tax election is independent of any state credit, and a qualified small business can use both.
Related pages
Official sources
Educational content only, not tax advice. See the disclaimer.