Gov. Abbott signed SB 2206 on June 17, 2025, modifying the R&D credit regime that existed since 2014. Franchise tax reports filed Jan. 1, 2026 onward are subject to this new law. The new law modified the calculation, eliminated the related sales tax exemption, added a refundable credit for certain businesses, made the franchise tax credit permanent, and increased conformity to federal definitions and methodology. 

Procedural changes and updated definitions

Businesses may claim a refundable credit if they fit into one of three categories: owing franchise tax liability under $1,000, earning revenue under $2.47 million for the annualized period, or qualifying as veteran-owned startup. Like California’s recent adoption of an Alternative Simplified Credit methodology, Texas has streamlined its R&D process. For example, legislation effective since 2014 permitted Texas businesses to choose between claiming a sales tax exemption for equipment used in qualified activities or an R&D tax credit against the franchise tax. Property acquired after Jan. 1, 2026 is no longer eligible for the sales tax exemption. 

Historically, Texas has departed from the federal definition of R&D, raising the threshold for documentation and innovation in Texas above the national standards. SB 2206 conforms directly to the federal definition of qualified activity, allowing taxpayers to avoid additional analysis to apply different thresholds of innovation. Statistical sampling and the federal Accounting Standards Codification 730 methodology are also now allowed under the new credit, providing compliance clarity for affected filers. 

Updated calculation method 

Texas maintains a modified version of the federal Alternative Simplified Credit (ASC). SB 2206 raises the amount of the credit from 5% to 8.722% of the current year’s qualified costs exceeding the base amount. Like the federal calculation for ASC, the base amount equals half the average of the preceding three years’ qualified expenses. If the business does not have three years of prior qualified expenses, the credit is 4.361% of the current year’s qualified costs. Payments made to higher education institutions (public or private) for qualified research qualify at a rate of 10.903%.

What does CohnReznick think?

Businesses that previously selected the tax exemption should now evaluate the higher cost of equipment and the potential to claim the franchise tax credit, which is calculated on a different set of factors. The added refundable provision may be especially relevant for businesses that previously claimed the sales tax exemption due to lack of franchise tax liability. Additionally, businesses that previously claimed the Texas R&D tax credit under the modified definition of qualified expenses may wish to reevaluate current and base period calculations to align with the federally-conforming definition of qualified activities and expenses. Business should consult with a trusted tax services provider for additional feedback on this issue.