- Texas legislation (S.B. 2006), submitted to Governor Abbott for signature, increases the percentage amount allowed in calculating the research and development (“R&D”) franchise tax credit.
- It also repeals the sales and use tax exemption for tangible personal property used in R&D.
- Pending the Governor’s signature, the legislation is effective January 1, 2026.
Background
New Texas legislation changes the tax implications surrounding R&D activities in Texas.
The Increased Franchise Tax Credit
Historically, Texas Tax Code § 171.654(a) generally permitted a five percent credit for the difference between the qualified research expenses (“QREs”) incurred during the taxable period less fifty percent of the average amount of QREs incurred during the three preceding tax periods (hereinafter referred to as the “Difference”). This section of the Tax Code also changed the amount of the credit applied to the Difference if the taxable entity had no QREs in one of the three prior periods or if it contracted with an institution of higher education for the performance of qualified research.
The new legislation repeals Subchapter M of Chapter 171 (though unused credits claimed under the repealed chapter can still be carried forward into tax years after the effective date of the legislation in accord with the provisions of Subchapter M) and recodifies the franchise tax R&D credits in Subchapter T of Chapter 171 (Texas Tax Code §§ 171.9201-171.9213) and increases the amount of the credit applied to the Difference, as summarized in this table:
| Factual Predicate | Old Credit under § 171.654(a) | Proposed New Credit Under Subchapter T |
|---|---|---|
| General | 5% | 8.722% |
| Contracting with Institutions of Higher Education | 6.25% | 10.903% |
| No Qualified R&D expenses in one of the three prior periods, generally | 2.5% | 4.361% |
| Contracting with Institutions of Higher Education and no Qualified R&D Expenses in one of the three prior periods | 3.125% | 5.451% |
Forvis Mazars Insight: The increase amounts to an approximately 75% increase in the amount of the franchise R&D tax credit.
Additional Franchise Tax Credit Provisions
Proposed Subchapter T contains several additional provisions that are applicable to the increased R&D franchise tax credit. The definition of “qualified research expense” ties directly to the amount on line 48 of federal form 6765. The amount of the defined “qualified research expense” is adjusted in the case of a federal amended return or a change because of a federal audit that impacts the amount reported on line 48. Taxpayers cannot claim expenses as QREs that were not incurred by the entity itself, a member of the combined group including the entity, or a lower tier entity.
The credit is generally limited to fifty percent of the amount due on a Texas franchise tax report, with a twenty-year carryover provision for unused credits. However, certain taxable entities (including new veteran-owned business and those with low revenue) that owe no tax can calculate the amount of their R&D credit pursuant to the proposed subchapter and obtain a refund in the amount of the credit. The credit cannot be assigned or transferred except in instances where substantially all of the assets of the taxable entity are transferred, conveyed, or assigned in the same transaction.
Taxable entities must apply for the R&D credit on or with the report for which the credit is claimed; if the entity is not required to file a report, it can claim the credit on a form proscribed by the Comptroller.
R&D Sales Tax Exemption Repealed
S.B. 2006 repeals Texas Tax Code § 151.3182. That provision of Subtitle E, the sales, excise and use subtitle, exempted the sale, storage or use of depreciable tangible personal property sold to a person engaged in, and directly used in, qualified research, provided that the person did not use the property as a basis for the R&D credit for franchise tax purposes.
How Forvis Mazars Can Help
Our credits and incentives team can help you figure out the impact of the increased franchise tax R&D credit, as well as the loss of the sales tax exemption, and consider your options before the effective date of the legislation.