The Question

“We keep hearing that Texas is becoming one of the best states for R&D credits. What’s actually changing — and does it matter for us?”

Texas has always had an R&D credit, but for many tech companies it was easy to ignore.
The rules didn’t align cleanly with federal law, refundability was limited, and the effort often outweighed the benefit.

That’s changing.

Starting in 2026, Texas is reshaping its R&D credit in ways that make it far more relevant — especially for software and technology companies with meaningful engineering payroll in the state.

But like most incentives, the value depends on the details.

The Short Answer

Texas’s R&D credit is becoming more attractive because:

• credit rates are increasing,

• the rules are aligning more closely with the federal R&D credit,

• carryforward periods are expanding,

• and refundability is being introduced for certain taxpayers.

For companies with real Texas-based R&D, this can meaningfully increase total credit value.

For companies with minimal Texas presence — or weak documentation — the impact will still be limited.

This isn’t a universal win. It’s a targeted one.

The Deep Dive

1. What’s Actually Changing in Texas

The most important shift is conformity.
Texas is moving closer to the federal definition of qualified research by tying its credit more directly to the federal framework and Form 6765 methodology.

This matters because it reduces friction.
When federal and state rules diverge, companies either skip the state credit or incur extra cost trying to reconcile two different systems. Texas is intentionally lowering that barrier.

On top of that, Texas is increasing credit rates:

• The standard credit rate is moving to approximately 8.7% of qualifying expenses.

• Credits tied to university research collaboration rise to approximately 10.9%.

These are meaningful rates by state-credit standards.

Texas is also extending the carryforward period to 20 years, which increases long-term usability, particularly for growing or pre-profit companies.

Finally, Texas is introducing refundability for certain small and veteran-owned businesses. While not universal, this is a notable shift in philosophy — one that brings Texas closer to states like Minnesota and Michigan in terms of early-stage usefulness.

2. Why Texas Suddenly Matters More for Tech Companies

For software and technology companies, the biggest driver of R&D credit value is payroll. Texas has quietly become one of the most important engineering hubs in the country — especially for companies looking to scale without California-level costs.

Under the updated rules, Texas becomes more compelling because:

• a larger share of engineering payroll can cleanly qualify,

• the state credit layers more effectively on top of the federal credit,

• the administrative burden is reduced,

• and the long carryforward window makes credits usable even if immediate tax liability is low.

In practical terms, Texas is shifting from a “nice to have” credit to one that can materially affect planning decisions.

3. What Hasn’t Changed (and Still Limits the Credit)

It’s important not to overstate the update.

Texas still requires:

• that the work be performed in Texas,

• that expenses meet the technical standard for qualified research,

• and that documentation supports the claim.

This is not a blanket incentive for having engineers on payroll.
Routine development, implementation, customer-specific work, and maintenance still do not qualify.

The credit also does not eliminate the need for discipline.
Companies with weak documentation or unclear project structure will not magically see larger benefits simply because rates increased.

4. Who Benefits Most from the Texas Changes

The companies most likely to benefit are those that:

• have a meaningful concentration of engineers in Texas,

• perform genuine technical experimentation or development,

• already qualify for the federal R&D credit,

• expect to grow R&D spend over time,

• and are building systems to support the credit year over year.

For these companies, Texas becomes a strong complement to the federal credit rather than an afterthought.

Companies with:

• small Texas teams,

• heavily offshore development,

• or primarily operational engineering work
  should temper expectations.

5. How Texas Fits Into a Broader R&D Strategy

One of the quieter implications of the Texas update is strategic.

When a state meaningfully improves its R&D incentives, it affects:

• hiring decisions,

• team location strategy,

• long-term tax planning,

• and, in some cases, valuation and diligence discussions.

Texas isn’t just increasing a credit.
It’s signaling that it wants to compete for innovation-driven businesses.

That doesn’t mean companies should move teams purely for tax reasons — but it does mean Texas now belongs in the conversation when planning where engineering growth happens.

The Takeaway

Texas’s updated R&D credit is real, meaningful, and worth understanding — but only in context.

The biggest gains will go to companies that:

• already perform qualifying R&D,

• have real Texas-based engineering,

• and treat the credit as a repeatable system, not a one-time event.

For those companies, the 2026 changes can materially increase total R&D credit value and improve long-term usability.

For everyone else, the update is a reminder of something more important:
state R&D credits only work when the underlying work, structure, and documentation are already there.

Texas is making it easier to benefit — not easier to qualify.