Texas Overhauls R&D Franchise Tax Credit and Advances Small‑Business Reforms

June 2025 brought major legislative changes for Texas businesses, with new laws that both supercharge research and development (R&D) incentives and ease burdens for small businesses. These reforms underscore Texas’s commitment to remaining a business-friendly state while fostering innovation and entrepreneurship.

Enhanced Franchise Tax Credit for R&D

Governor Greg Abbott signed Senate Bill 2206 into law on June 17, 2025. The bill significantly strengthens the R&D franchise tax credit, increasing the rate from 5% to 8.722% for qualifying research expenses. The changes will take effect for franchise tax reports due on or after January 1, 2026.

This legislation also aligns Texas’s credit with federal R&D definitions, allowing businesses to reference IRS Form 6765 and supporting methodologies. Importantly, the credit is now permanent, removing its previous expiration date in 2026.

While the credit becomes more generous, it comes with a trade-off. The bill repeals the sales and use tax exemption for certain R&D-related property, effective January 1, 2026. Businesses will need to evaluate which benefit provides greater value under their specific circumstances.

Streamlining for Small Businesses

Also on June 17, Governor Abbott signed several bills designed to reduce barriers for small business owners. These include House Bills 346, 2464, and 5195, which together modernize filing systems, remove unnecessary regulation, and improve state digital services.

• HB 346 enables expedited business filings and makes permanent the exemption from franchise taxes and fees for veteran-owned businesses.
• HB 2464 limits the ability of cities to impose new regulations on certain home-based businesses.
• HB 5195 directs state agencies to modernize their online platforms for improved access to business services.

Governor Abbott emphasized that small businesses account for nearly half of the state’s workforce and play a critical role in Texas’s economic success. These changes aim to remove obstacles that prevent entrepreneurs from growing and thriving.

Fort Worth Named Aviation and Defense Capital

In a symbolic move reinforcing the state’s support for regional innovation, Senate Concurrent Resolution 142 officially designates Fort Worth as the “aviation and defense capital of Texas.” This strengthens the city’s position as a national center for advanced manufacturing and aerospace development.

Next Steps for Business Leaders

With these new laws taking effect in 2026, companies should begin preparing now:

• Review your R&D expenditures and consider transitioning to the enhanced franchise tax credit.
• Confirm that your R&D documentation aligns with federal standards to ensure eligibility and audit readiness.
• Take advantage of new filing options and tax relief programs-especially for veteran-owned and home-based businesses.
• Watch for updates from state agencies as they modernize their online services under HB 5195.

These legislative changes send a clear signal: Texas intends to remain a top destination for innovation and small business success.