If your engineering or architecture firm looked at the Texas R&D credit a few years ago and was told you didn’t qualify, that answer has changed.
In this article
- Why Engineering and Architecture Firms Are Back In
- A Short History: Why Design Firms Were Told No
- Texas R&D Credit Basics
- What Qualifies in an Engineering or Architecture Practice
- Client-Funded Work Can Absolutely Qualify
- What the Texas R&D Credit Is Worth
- The Refundable Credit, and How It Actually Works
- The Base Period Question, and Why It Matters Most to Firms Like Yours
- Two Deadlines and One Transition Detail
- Frequently Asked Questions
The Legislature rebuilt the credit from the ground up in Senate Bill 2206, and it’s hard to read the result as anything other than a deliberate course correction. The credit got larger, it became permanent, it became refundable for smaller taxpayers — and, most importantly for a design practice, Texas gave up the piece that kept service firms out.
States tinker with incentives constantly. It is rare to see one made larger and permanent in the same bill, and rarer still for the legislature to also remove the administrative barriers that were keeping companies from using it. Texas did all three.
What the Legislature Did
SB 2206 · Key changes
- Raised the rate from 5% to 8.722% — and to 10.903% for research done with a Texas university
- Made it permanent. The old credit was scheduled to expire at the end of 2026. That cliff is gone.
- Made it refundable for smaller taxpayers — actual cash, even in a year with no franchise tax owed
- Extended the carryforward to 20 consecutive reports
- Handed the definition of qualified research to the federal return, so Texas no longer writes its own
Why Engineering and Architecture Firms Are Back In
The rate increase is welcome. The structural change is what matters to you.
Under the old law, Texas defined qualified research itself — by reference to the Internal Revenue Code as it existed on December 31, 2011, with the Comptroller free to interpret that frozen snapshot through its own rule and reach conclusions independent of the IRS.
Under the new law, a Texas qualified research expense is defined as the portion of the amount you report on line 48 of federal Form 6765 that is attributable to research conducted in Texas. That’s the whole definition.
The Practical Meaning
Texas no longer writes the definition. If an expense makes it onto line 48 of your federal return, the Texas question is no longer whether it’s qualified research — it’s where it was performed.
The narrowing interpretations that had been applied to service firms have nothing left to attach to. There is one qualification question now instead of two, and it’s answered at the federal level where the rules are the same for everyone.
A Short History: Why Design Firms Were Told No
This matters because a lot of design firms still carry the impression that Texas doesn’t want them in this program. It’s worth understanding where that came from, and why it no longer applies.
In October 2021 the Comptroller rewrote the rule governing the franchise tax R&D credit. The prior version ran about 2,500 words and defined qualified research by simple reference to federal law. The replacement ran roughly 12,700 words, and it added two sentences with no counterpart anywhere in the Internal Revenue Code or its regulations.
The first said that a service provided to a customer is not a business component.
The second said that a design is not a business component — and spelled out what that meant: “the design of a structure is not a business component, although the structure itself may be a business component. Similarly, a blueprint or other plan used to construct a structure that embodies a design is not a business component.”
For a design practice, that defined the deliverable out of existence. The only thing left that could qualify was the structure itself, which you don’t build and don’t own.
The Rule’s Own Examples Show How It Worked
The Comptroller wrote worked examples into the rule, and two are drawn from construction and engineering.
In the first, a firm’s engineers “were uncertain how to design the structure to ensure stability of the structure’s foundation.” They applied professional experience and the building codes, then built a test pile on site to check the design. The conclusion:
“The taxable entity’s activities in using professional experience and building codes to design the foundation did not meet the Process of Experimentation Test… Constructing the test pile also did not meet the Process of Experimentation Test because it was not an evaluative process.“
In the second, a firm was uncertain how to lay out an office building’s electrical systems and used computer-aided simulation and modeling to arrive at the final design. Also denied: “While in some cases computer-aided simulation and modeling may be an experimental process, in this case, it was not.”
Building a physical test to resolve a foundation question, not evaluative. Running simulations to choose between routing options, not experimentation. If you were ever told your firm didn’t qualify, those two examples are very likely the reason.
The Rule Also Reached Backward
It applied to franchise tax reports due on or after January 1, 2014 — seven years of already-filed returns, under a rule that had said something considerably simpler at the time.
The Texas Taxpayers and Research Association and the Council On State Taxation objected jointly in May 2021:
“Prior to these proposed rules, many taxpayers claiming a Texas R&D credit or the sales and use tax exemption did so on the belief that the federal regulations applicable to the research credit under IRC §41 applied with equal force to the Texas incentives… Accordingly, applying these rules retroactively by seven years to 2014 is fundamentally unfair.“
The Texas Oil & Gas Association, the Associated General Contractors of Texas, Celanese, RSM and others made the same request at a public hearing that June. The Comptroller’s position was that the additions were “expositions of existing Comptroller policy … rather than changes.”
By late 2021 there were roughly 1,200 R&D audit assignments open across about 450 taxpayers. A 2022 rewrite of the rule gave ground on two narrow points — how federal regulations are applied, and combined-group carryforwards — but not on retroactivity, services, designs, or the burden of proof, which the rule set at clear and convincing evidence, higher than the federal standard.
Design firms lost years in that window. Some stopped claiming, some never started.
The Legislature looked at all of it and acted. Senate Bill 2206 replaced the old credit with one that takes its definition of qualified research straight from the federal return — a pro-taxpayer course correction, and a real simplification for every firm that had been maintaining two different answers to the same question.
What the Legislature Quietly Deleted
Three things went away with the old subchapter, and none of them got a replacement.
The old statute contained an express provision titled Burden of Establishing Credit: “The burden of establishing entitlement to and the value of the credit is on the taxable entity.” The rule built on it, setting the standard at clear and convincing evidence — a genuine obstacle for a firm reconstructing project records. The new subchapter contains no burden provision at all.
The old statute also said the Comptroller shall adopt rules to implement the credit. The new one says may. As of today, none has been adopted.
And the old subchapter’s terms — funded research, internal use software, business component, recordkeeping — appear nowhere in the new one. Not narrowed. Absent.
That cuts both ways, and you should hear the second half. There is no rule defining what “attributable to research conducted in this state” means, no documentation standard, and no published methodology for splitting a national figure to Texas. The added interpretive layer is gone; so is the roadmap. On 2026 filings that is the open question, and it is a reason to build the Texas attribution deliberately rather than assume it falls out of the federal study.
Texas R&D Credit Basics
A lot of design firms have never claimed this credit, so here is the ground floor.
What the Credit Is
The research and development credit rewards companies for resolving technical uncertainty. It is not a grant, not a deduction, and not limited to laboratories. It is a dollar-for-dollar credit against tax, calculated on what you spend on the people doing technical work.
The Four Questions That Decide It
- Permitted purpose — was the work aimed at a new or improved function, performance, reliability or quality of something you design, build or use in your business?
- Elimination of uncertainty — at the outset, was there genuine technical uncertainty about whether it could be done, how to do it, or how it should be designed?
- Process of experimentation — did you identify alternatives and systematically evaluate them, through modeling, analysis, simulation or testing?
- Technological in nature — did the work rely on engineering or physical science?
Nothing in that test requires a lab, a patent, a research department, or a discovery that’s new to the world. New to you is enough.
What It’s Calculated On
Qualified research expenses — principally the wages of the people performing, directly supervising, or directly supporting the technical work, plus supplies consumed and a portion of contract research. In a design practice, wages are almost all of it.
One thing to understand before doing arithmetic in your head: the credit is incremental. It is calculated on qualifying spend above a base amount, not on your total. A real estimate needs your prior-year history, not just this year’s payroll.
What Qualifies in an Engineering or Architecture Practice
- Structural, mechanical, electrical and plumbing system design where the solution wasn’t obvious from the outset — unusual loads, constrained sites, atypical geometry, performance requirements your standard detail doesn’t meet
- Evaluating design alternatives — the schematic and design development work where you model options and eliminate them
- Energy modeling and building performance analysis, including iterations to hit a target
- Constructability and means-and-methods development on projects where the standard approach doesn’t work
- BIM clash detection and resolution where it drives design changes rather than documenting them
- Sustainable and code-compliance design requiring technical analysis rather than checklist application
- Site and civil engineering — drainage, retention, geotechnical response, unusual soil or hydrology conditions
- Renovation and adaptive reuse where existing conditions are unknown and the design has to respond to what’s found
What doesn’t qualify: applying a standard detail you’ve used before, purely aesthetic decisions, routine code checking, and producing construction documents once the technical questions are settled.
Client-Funded Work Can Absolutely Qualify
Almost everything a design firm does is paid for by a client, and there’s a persistent belief that this alone disqualifies you. It doesn’t. Plenty of client work qualifies — the question is what your agreement says, and two features in particular work in your favor.
| What helps | Why |
|---|---|
| Your fee depends on the work meeting defined technical criteria | Where payment is tied to the result rather than simply to effort delivered — acceptance against stated performance requirements, obligations to revise at your own cost if the design doesn’t perform — the amounts you receive generally aren’t treated as funding your research. |
| You keep the right to use what you developed | If you can reuse the detail, the model, the system approach or the method on other projects without paying for the privilege or asking permission, you retain substantial rights. It does not have to be exclusive — the client can have rights too, and often does. |
Those are also both things you can influence. A firm that knows which clauses matter can negotiate for them on the next agreement, and many owners are entirely willing to let a designer reuse its own technical approaches.
What to Look for in Your Agreements
- Performance criteria and acceptance language — the more your deliverable has to actually achieve, the better
- Re-performance obligations — a duty to correct at your own cost is a feature here, not a bug
- Reuse and ownership terms — language letting you retain or license back your own methods and details
The terms that work against a claim are the narrow ones: work product declared the client’s absolute property, or reuse requiring the client’s written approval. Those are negotiable, and worth negotiating.
This analysis is contract-by-contract rather than firm-wide, which is good news — one restrictive agreement doesn’t cost you the rest of your book. And it’s forward-looking: knowing what drives the outcome is worth more on your next contract than on your last one.
What the Texas R&D Credit Is Worth
| Situation | Rate |
|---|---|
| Standard | 8.722% of Texas qualified expenses above 50% of the average for the three preceding tax periods |
| No Texas qualified expenses in one or more of those three periods | 4.361% of all current-period Texas expenses |
| Firm contracts with a Texas public or private institution of higher education and incurs qualified expenses under that contract | 10.903% — applied to all your Texas qualified expenses above the same base, not just the contracted portion |
| Same, with no Texas expenses in one or more prior periods | 5.451% of all current-period Texas expenses |
That third row deserves a second read, because it’s the most generous provision in the bill and the easiest to miss. The statute sets no minimum contract size, and the higher rate lifts your entire Texas base. One qualifying research agreement with UT, Texas A&M, Rice, Texas Tech or any other Texas institution raises the rate on everything from 8.722% to 10.903% — a 25% increase in the whole credit. For design firms already doing sponsored or collaborative work with a university, that relationship is worth more than you’d think.
The credit is capped at 50% of franchise tax due before other credits, and carries forward up to 20 consecutive reports. Worth knowing: that 50% ceiling applies separately to each R&D regime, so an old carryforward and a new credit each get their own.
The Refundable Credit, and How It Actually Works
This is the change that decides whether the credit is usable rather than merely available, and it deserves more than a passing mention.
A credit normally reduces tax you owe. If you don’t owe any, it sits there — you carry it forward and hope for a better year. Plenty of smaller design practices have never had enough franchise tax liability for a credit to be worth the trouble of computing.
Texas fixed that. A qualifying entity can now take the credit as an actual payment from the state rather than an offset.
Who Qualifies
You’re eligible for the refundable version if you owe no franchise tax for the period for any of three reasons:
- You’re a qualified new veteran-owned business
- Your computed franchise tax is less than $1,000
- Your annualized total revenue falls at or below the no-tax-due threshold for the report year
Note what that list means in practice: this is aimed at newer and smaller firms, and at firms having a lean year. A practice that is growing, reinvesting, or simply between large projects can land in it without being a startup.
How It Works Mechanically
- You compute the credit the same way. Same rates, same base period, same Texas attribution. Nothing about the calculation changes.
- The 50% limitation doesn’t constrain it. The cap exists to limit how much credit can offset tax due — and there’s no tax due in this scenario.
- It’s claimed on Form 05-183 — plus Form 05-184 if you file as a combined group — rather than on the ordinary credit schedule.
- You submit your federal Form 6765 to the Comptroller as part of the claim, not just to the IRS.
- You can’t do both on the same dollars. The same qualified expenses can’t generate a regular credit and a refundable credit in the same year — it’s one or the other.
The Base Period Question, and Why It Matters Most to Firms Like Yours
Your credit is measured against the average of your three preceding tax periods. Under the new law those prior years have to be restated using the new definition — the Texas-attributable portion of federal Form 6765 line 48, applying the federal law in effect for each of those years.
The Comptroller says so directly in the 2026 report instructions, and warns that the restated figure “may be different than the qualified research expenses reported to claim a Subchapter M research and development credit” in earlier years.
Here is why that lands differently on a design firm. Under the old law, a taxpayer could demonstrate Texas qualified expenses without ever filing a federal Form 6765 — and many service firms did exactly that, because the federal position was contested and the Texas determination stood on its own.
If your firm has no federal Form 6765 for the base years, there is nothing on line 48 to restate. The base may be zero, which puts you on the 4.361% rate applied to your entire current-year Texas spend with no base subtraction.
Three things before anyone gets excited about that.
It’s mandatory, not elective. If you have no qualified expenses in even one of the three preceding periods, the flat rate applies whether or not it’s better for you. With two strong base years and one gap, it can produce a smaller credit than the standard calculation would have — and there’s no election out.
Amending your federal returns later can undo it. An amended Form 6765 filed before the federal refund window closes counts for Texas purposes — and Texas law now requires an amended Texas report when your federal qualified expenses change. Going back to pick up federal credits for 2023–2025 can retroactively destroy a zero base and compel you to give Texas credit back.
No rule has been issued. The Comptroller’s position on the base lives in form instructions, not in an adopted regulation, and the old rule has not been updated. This is a well-supported reading of the statute, not settled administrative law.
Two Deadlines and One Transition Detail
- If your firm — or any member of your combined group — used a Texas R&D sales tax exemption during your 2025 accounting period, you cannot claim the credit on the 2026 report. The exemption was repealed effective January 1, 2026 as part of consolidating two competing incentives into one, and the statute bars the credit for any report period in which the exemption was received. Your first credit year would be the 2027 report. This is less common for service firms than for equipment-heavy manufacturers, but check before assuming.
- If you’re claiming the refundable credit, Form 05-183 is due November 15 of the report year. The Comptroller does not accept it late — no extension, no reasonable-cause relief. It belongs on a calendar now.
- Entities filing under the E-Z computation aren’t eligible for the refundable credit, even with tax computed under $1,000. Worth knowing before you choose a filing method.
- You must have filed a Form 6765 with the IRS for each year you claim the Texas credit. If your firm has never filed one, the Texas credit starts with a federal study.
Frequently Asked Questions
We’re an ESOP. We don’t file Form 6765 because we can’t use the federal credit. Can we still claim in Texas?
Yes — but you’ll need to start filing the federal form, and this is a real change that lands hard on employee-owned firms.
A company owned entirely by an ESOP generally pays no federal income tax at the entity level, so the federal research credit is worth nothing to it. Plenty of ESOP-owned engineering and architecture firms have therefore never filed a Form 6765. Under the old Texas rules that was fine — a taxpayer could demonstrate Texas qualified research expenses independently.
Under the new rules it isn’t. Texas defines a qualified research expense as the Texas-attributable portion of the amount reported on line 48 of Form 6765, and the Comptroller has stated the credit requires a Form 6765 to have been filed with the IRS for each year claimed. The 2026 report instructions are blunt: if the entity did not report federal qualified research expenses for the period, it is ineligible to create a credit for that report year.
So the federal form becomes the price of admission — but what you get for the trouble is a Texas franchise tax credit at 8.722%, which, unlike the federal credit, is a benefit an ESOP-owned company can actually use, because the franchise tax is an entity-level tax the ESOP structure doesn’t eliminate.
Nothing prevents you from filing it. You compute and report qualified research expenses on the federal form in the ordinary way; the resulting federal credit simply goes unused. For a lot of employee-owned design firms, this is the first time the R&D credit has been worth anything at all.
Two things to work through with your advisor before you commit:
- The base period. If you’ve never filed a Form 6765, you have nothing on line 48 for the three preceding periods either. That may put you on the mandatory 4.361% rate applied to your entire current-year Texas spend — see the section above, including the reasons that can cut both ways.
- The §280C election. Claiming the gross federal credit ordinarily reduces your federal research deduction. For a company with no federal taxable income at the entity level, that reduction may cost nothing — but the analysis depends on your ownership structure, and it is different for a partially-owned ESOP than for a 100% ESOP-owned S corporation. Get it modelled rather than assumed.
We’ve never claimed the R&D credit anywhere. Where do we start?
With the federal study, because Texas now runs off it. In practice the two get scoped together — but understand that a standard federal study does not produce a Texas attribution split. If Texas matters to you, say so at the outset or you’ll pay for the work twice.
We claimed the Texas credit before 2021 and stopped. What about those years?
Report years originally due before January 1, 2026 are still governed by the old rule — including the service and design exclusions. If you have open pre-2026 years, whether under audit, on a refund claim, or sitting on a carryforward, that exposure did not go away when the Legislature changed the law going forward. Worth a conversation separately from the 2026 planning.
Does an IRS audit settle the Texas question now?
Largely, yes, and that is new and helpful. If the IRS audits and finally adjusts your line 48 figure, Texas uses the adjusted number — and Texas law now requires you to file an amended Texas report when your federal qualified research expenses change. Under the old rule an IRS determination was expressly not binding on the Comptroller in either direction. What Texas still decides for itself is the allocation — which of those expenses are attributable to research conducted in Texas.
Our firm is part of a combined group. Does that complicate the base?
It can, and here the law has a genuine gap. The credit is claimed on the combined report and the group is treated as the taxable entity. But the old provision addressing what happens to research expenses when a controlling interest transfers was repealed without a replacement — so for a group whose membership changed during the base years, how to build the three-period average is not addressed by the statute, by any rule, or by the forms. If that describes you, do not assume the old answers carry over.
How does Texas compare to other states now?
Well. A permanent, refundable credit at 8.722% with a 20-report carryforward and a federal-conformity definition puts Texas ahead of most states that offer an R&D incentive at all — and well ahead of where Texas itself sat two years ago.
Where to Start
Send us two things: a description of the technical work your firm does, and your Texas professional-staff wage base. That’s enough for a realistic range.
If you claimed this credit before 2021 and stopped, tell us — the base period analysis is different for you, and it may be worth more than you’d expect.
This article is general information, not tax advice for your situation. R&D credit eligibility depends on your specific facts, contracts and records.
Current as of September 2026.
