Texas just made its research and development tax credit bigger, simpler, and — for the first time — refundable. Colorado didn’t touch its R&D credit at all this year, and the two states’ approaches are now further apart than ever. Starting with franchise tax reports originally due on or after January 1, 2026, Texas businesses that do qualifying research get a credit nearly 75% larger than before, with no requirement to owe franchise tax to collect it. Colorado’s research credit, meanwhile, remains a narrow, enterprise-zone-only benefit that most Denver business owners never even learn they’re ineligible for. If your business does any product development, engineering, software work, or process improvement in Houston, The Woodlands, or Denver, this is worth a close look before your next filing.
What Changed for Texas Business Owners in 2026
Governor Abbott signed Senate Bill 2206 on June 22, 2025, overhauling the franchise tax research and development credit effective for reports due on or after January 1, 2026. The old 5% credit and the separate sales tax exemption for R&D equipment were both set to expire at the end of 2026 anyway — SB 2206 repeals them early and replaces them with a single, permanent, more generous credit. The standard rate is now 8.722% of current-period qualified research expenses (QREs) above 50% of the average QRE from the prior three tax periods, up from 5%. Businesses with no QRE history in one or more of those three years instead get a 4.361% base rate, and research performed under contract with a Texas public or private university earns an even higher 10.903% (or 5.451% without prior QRE history). QREs are measured the same way the IRS measures them on line 48 of federal Form 6765, limited to research actually conducted in Texas.
Why Houston and The Woodlands Businesses Should Pay Attention
A Credit You Can Collect Even With No Franchise Tax Due
The single biggest change for small and mid-size businesses is refundability. Under the old rules, the R&D credit could only offset franchise tax you actually owed. Under SB 2206, if your business has qualifying research expenses in a period when you owe no franchise tax — including many businesses under the no-tax-due revenue threshold — you can claim the credit as a cash refund instead of letting it go to waste. For non-refund claims, the credit (including any carryforward) is still capped at 50% of the franchise tax due before other credits, and unused amounts carry forward for up to 20 consecutive reports. One catch: a business that claimed the old sales tax exemption on R&D equipment during a report period is not eligible for the new credit for that same period, and the credit generally can’t be transferred to another entity outside of an asset sale.
Why Denver Business Owners Are Working With a Much Narrower Credit
Enterprise Zone Only, Nonrefundable, and Capped at 25% a Year
Colorado’s R&D credit was never as broad as Texas’s, and it hasn’t moved while Texas’s has. It is only available for research conducted inside a designated Colorado Enterprise Zone, and claiming it requires pre-certification from that zone’s local administrator before the work even counts — a step plenty of Denver businesses skip simply because they don’t know their location qualifies, or don’t realize certification has to come first. The rate is 3% of current-year QRE above a base equal to the average of the prior two years’ QREs, versus Texas’s 8.722%. It is nonrefundable and can only offset Colorado income tax, never paid out in cash. And even a business that qualifies can typically use only about 25% of its earned credit per year, carrying the rest forward indefinitely — so a credit that looks meaningful on paper can take years to actually realize. For a Denver business doing the same kind of product or process development as a comparable Houston company, the practical value of the state credit is a fraction of what its Texas counterpart now receives.
What To Do Before Your Next Filing
- If you’re in Houston or The Woodlands and do any engineering, software, formulation, or process-improvement work, pull together your QRE documentation now — the higher refundable credit applies to reports due on or after January 1, 2026, and the refund claim is due by that report’s own due date.
- If your Texas business previously relied on the sales tax exemption for R&D equipment, check whether that exemption applied during the same period you’d claim the new credit — you can’t use both for the same period.
- If you’re in Denver, confirm whether your business address sits inside a certified Colorado Enterprise Zone before assuming you’re ineligible — and get pre-certification from the zone administrator before you start claiming expenses.
- If you have Colorado R&D credit carryforward sitting unused, review whether the 25%-per-year limit means you should be claiming it every year rather than letting it sit.
At Petry Tax & Advisory, we help business owners across Houston, The Woodlands, and Denver figure out exactly which R&D credits they qualify for and how to document them properly — contact us for a consultation before your next franchise or income tax filing.
This post is for general informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional about your specific situation.
Sources: Texas SB 2206 Bill History (Texas Legislature Online) | Colorado Enterprise Zone Program (OEDIT)
lucy.petry@petrylawfirm.com
