A pre-revenue startup can spend heavily on product development and
still owe no Texas franchise tax. Historically, that made a franchise tax credit much less exciting. There was little or no Texas tax for the credit to offset.
Beginning with Texas franchise tax reports due on or after January 1, 2026, that changes.
Texas replaced its prior R&D credit with a new Subchapter T credit. One of the biggest changes for startups is that certain companies that owe no Texas franchise tax can receive the R&D credit as a refundable credit. In other words, qualifying companies may be able to receive money back rather than simply carry a credit forward.
But the new rules also make good federal R&D documentation, and good location tracking, much more important.
01Texas Now Starts With Your Federal R&D Expenses
The new Texas credit is closely tied to the federal research credit.
Texas defines qualified research expenses for the new credit by starting with the taxpayer's total QREs reported on Line 48 of federal Form 6765 and then determining the portion attributable to research conducted in Texas. The IRS likewise uses Line 48 to report total federal QREs.
That means companies can no longer approach the Texas credit as an entirely separate R&D exercise. If the company intends to claim the Texas credit, it needs to have qualifying federal R&D expenses and file Form 6765 with the IRS for the applicable year.
Then comes the Texas question:
How much of those federal QREs relate to research actually performed in Texas?
For a distributed startup, that can make a substantial difference.
Suppose a company has a software developer working in Houston, a founder performing product-development work in California, and an engineering contractor working from New York.
The federal R&D calculation may include qualifying expenses associated with all three. The Texas calculation, however, is limited to the portion attributable to research conducted in Texas.
02A Houston Vendor Is Not Necessarily a Texas R&D Expense
This distinction is particularly important for contractors.
A company may receive invoices from a development agency headquartered in Houston. That fact alone does not establish that the research was conducted in Texas.
If the people performing the qualifying research are actually working in Texas, the applicable federal QRE may be a Texas QRE. If those developers are working remotely from California, New York, another country, or somewhere else, the vendor's Houston billing address does not turn the work into Texas research.
The Texas statute focuses on expenses attributable to research conducted in Texas, not simply where the vendor is incorporated or sends its invoices.
For startups using remote employees and contractors, this makes location documentation much more important.
03Start Tracking Texas R&D Before Year-End
Trying to reconstruct a distributed engineering team's location twelve months later can be difficult. A better approach is to build location into the R&D tracking process from the beginning.
CostWhat to trackEmployee wagesEmployee work location, R&D projects, and time spent on qualified activitiesContractorsWhere the people performing the research actually work, along with contracts and statements of workComputer usageQualifying costs connected with the research and the projects or personnel using themProjectsWhich technical work was performed in Texas versus elsewhere
Federal QREs can include qualifying employee wages, supplies, contract research expenses, and certain amounts paid for the right to use computers in qualified research. Not every engineering, SaaS, hosting, or cloud expense automatically qualifies.
The point is not to create a second accounting system for Texas. It is to preserve enough information to take the company's federal QREs and reliably identify the Texas portion.
04The Big Change for Pre-Revenue Startups: The Credit Can Be Refundable
The refundable credit may be especially valuable for early-stage companies.
Texas says a taxable entity that does not owe franchise tax may qualify for a refundable R&D credit when it owes no tax because:
- its annualized total revenue is at or below the no-tax-due threshold;
- its calculated franchise tax is less than $1,000; or
- it qualifies as a new veteran-owned business.
A company using the Texas E-Z computation is not eligible for the refundable credit.
For the 2026 Texas report, the no-tax-due threshold is $2.65 million of annualized total revenue. Companies at or below that threshold generally are not required to file a Texas franchise tax report, although corporations, LLCs and certain other entities still must file their Public Information Report.
That does not prevent them from claiming the refundable R&D credit.
05How Does a Pre-Revenue Startup Actually Claim the Refund?
A startup that is below the Texas no-tax-due threshold does not need to file a Long Form Franchise Tax Report solely to claim the refundable R&D credit.
Instead, Texas created a separate filing process for companies that otherwise owe no franchise tax.
An eligible company generally:
- Files its required Texas Public Information Report or Ownership Information Report.
- Files federal Form 6765 with the IRS.
- Completes Texas Form 05-183, Application for Franchise Tax Subchapter T Research and Development Activities Refundable Credit.
- Includes a copy of the federal Form 6765 with the Texas application.
For a combined group, Form 05-184, the refundable credit affiliate list, is also required.
Unlike the regular Texas franchise tax return, Form 05-183 is a separate downloadable Texas Comptroller form that is submitted outside the normal electronic franchise tax return filing process. The Comptroller's filing guidance instructs taxpayers using downloadable forms to print and mail them or return them to a Comptroller office.
This is important operationally. A startup should not assume that preparing its regular Texas filing, or simply completing federal Form 6765, automatically claims the Texas refund.
The Form 05-183 deadline is also unusually strict. The application is generally due by November 15 of the applicable report year, and the Comptroller states that it will not accept Form 05-183 after the applicable due date.
06How Much Could the Texas Credit Be?
The calculation depends on the company's Texas QRE history.
For many new startups, the most relevant rule is the one that applies when the company has zero Texas QREs in at least one of the preceding three tax periods.
In that situation, the standard credit is 4.361% of current-period Texas QREs. Texas provides higher rates for qualifying research performed under contracts with certain institutions of higher education.
For example, if an early-stage company had $250,000 of qualifying Texas QREs and met the 4.361% calculation, its Texas R&D credit would be approximately $10,903.
Companies with Texas QREs in all three preceding periods use a different incremental formula, generally based on 8.722% of the excess of current Texas QREs over 50% of the average Texas QREs for the preceding three periods.
So the Texas credit should not simply be estimated as a fixed percentage of total federal R&D expenses.
One Deadline Founders Should Not Miss
The refundable credit has its own filing deadline.
The Comptroller states that Form 05-183 is generally due by November 15 of the applicable report year, and it will not accept Form 05-183 after the applicable due date.
That makes early planning particularly important. A company should not wait until the following year's federal tax preparation cycle to decide whether it wants the Texas refund.
There is also a timing nuance that can be confusing: the Texas report year is not necessarily the year in which the R&D spending occurred. For example, a calendar-year company's 2026 Texas franchise tax report is generally based on its federal accounting period ending December 31, 2025.
07What Founders Should Do Now
If your startup performs R&D in Texas, the practical steps are fairly straightforward:
- Make sure qualifying research is being documented for federal Form 6765.
- Track where employees and contractors actually perform the research.
- Separate Texas research costs from work performed elsewhere.
- Determine early whether the company may qualify for the refundable credit and calendar the Form 05-183 deadline.
The biggest mistake would be assuming that this can all be reconstructed when the Texas return is prepared.
For distributed startups, the accounting records may show who was paid. They often do not show where the underlying research was performed.
Under the new Texas R&D rules, that distinction can determine how much of the federal R&D spend produces a Texas credit, and for some early-stage companies, how much cash can actually come back to the business.
This article is general information, not tax or legal advice. The rules are fact-specific, change over time, and depend on details unique to your company. Talk to us about how they apply to your situation.