Are R&D Tax Credits
Available in Texas?
Yes. Beginning with tax returns filed after January 1, 2014 (for tax years ended in 2013), taxpayers in Texas can claim the Research and Development (R&D) Tax Credit to offset a portion of their franchise tax or apply it toward a sales and use tax exemption on depreciable tangible personal property used in qualified research in Texas.
Key Highlights of the Texas R&D Tax Credit:
Qualified Research Expenses (QREs)
Same as defined under IRC §41, but must be for research conducted within Texas.
Credit amount
5% of the excess QREs in the current year over the base amount (50% of the average QREs for the prior three years).
If no QREs exist in one or more of the three prior years, the credit equals 2.5% of current year QREs.
Franchise Tax Credit Limit
Cannot exceed 50% of franchise tax due for the period.
Carryforward
Unused credits can be carried forward for up to 20 consecutive report years.
Sales & Use Tax Exemption
Available for activities beginning after January 1, 2014.
Internal Use Software (IUS)
Texas does not exclude software used in qualified research or production processes meeting the 4-Part Test. Texas uses the federal pre-2016 IUS definition.
Exclusions
Items exempt from Texas sales/use tax (manufacturing exemption, resale exemption) are not eligible as QREs. Taxpayers must choose between the sales/use tax exemption or the supplies credit.
Combined Groups
Credit carryforwards are attributed to members of the combined group in the year earned and may only continue if the attributed member remains part of the group.
Burden of Proof
Texas follows IRC §41 for definitions, but federal case law is persuasive, not binding, on the Texas Comptroller.
Texas R&D Tax Credit Case Study
An Austin-based software developer began operations in 2016. The company has steadily increased its research expenditures primarily through the addition of both experienced and inexperienced developers. The client has been claiming the federal R&D Tax Credit since 2019 and the Texas R&D Tax Credit beginning for the tax year ended December 31, 2023.
FEDERAL | TEXAS | |||
Year | Total QREs | Credit | Total QREs | Credit |
2024 | $750,000 | $75,000 | $750,000 | $24,583 |
2023 | $650,000 | $65,000 | $650,000 | $22,500 |
2022 | $500,000 | $50,000 | $500,000 | N/A |
2021 | $400,000 | $40,000 | $400,000 | N/A |
Total | $2,300,000 | $230,000 | $2,300,000 | $47,083 |
Federal R&D Tax Credit Summary
| Year | Total QREs | Federal Credit |
|---|---|---|
| 2024 | $750,000 | $75,000 |
| 2023 | $650,000 | $65,000 |
| 2022 | $500,000 | $50,000 |
| 2021 | $400,000 | $40,000 |
| Total | $2,300,000 | $230,000 |
Texas R&D Tax Credit Summary
| Year | Texas Credit |
|---|---|
| 2024 | $24,583 |
| 2023 | $22,500 |
| 2022 | NA |
| 2021 | NA |
| Total | $47,083 |
Criteria for Qualifying Research Activities
The four-part test below defines what counts as qualified research activities
Purpose of the Research
The activity should develop or improve a business component, such as a product, process, software, formula, technique, or invention, by enhancing functionality, performance, reliability, or quality.
Resolving Uncertainty
The work must address technical uncertainties, such as determining the optimal design, method, or approach to achieve the desired outcome. The results should not be known in advance
Systematic Experimentation
Eligible research must follow a structured experimentation process, including trial and error, modeling, simulation, or testing alternatives to reach the intended improvement.
Technological Basis
The activity must rely on hard sciences such as engineering, physical or biological sciences, or computer science. Artistic, social science, or routine data collection work does not qualify.
Why the R&D Tax Credit Matters ?
Since 1981, the R&D Tax Credit has helped businesses save billions in federal and state taxes. The credit enables companies to hire more staff, expand R&D, invest in facilities, and drive innovation. Thousands of businesses across multiple industries take advantage of this benefit each year.