End-of-Year Tax Credits for Texas Businesses: Maximize Savings Before December 31

As the calendar year winds down, Texas business owners have a narrow window to take actions that can generate meaningful tax savings. While Texas has no state income tax, businesses operating in Texas are still subject to the Texas franchise tax and federal income taxes — and both offer credit opportunities that require year-end planning to maximize.

This guide covers the tax credits and incentives Texas businesses should evaluate before December 31, with specific attention to actions that must be taken before year-end to qualify.

Federal Tax Credits Available to Texas Businesses

Research and Development (R&D) Tax Credit

The federal R&D tax credit under IRC Section 41 is one of the most valuable and most underutilized credits available to Texas businesses. Many business owners assume the R&D credit is only for high-tech companies or pharmaceutical firms, but the definition of qualifying research is broader than most people realize.

Activities that may qualify include developing new products, improving manufacturing processes, designing custom software, engineering prototypes, and testing new materials or formulations. The credit is calculated based on qualifying research expenditures incurred during the tax year, so documenting these activities before December 31 is essential.

Small businesses with less than $5 million in gross receipts can apply the R&D credit against payroll taxes rather than income taxes, making it valuable even for pre-profit startups. Full guide to Texas business tax credits.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit provides a federal tax credit for hiring employees from targeted groups, including veterans, long-term unemployed individuals, ex-felons, SNAP recipients, and residents of Empowerment Zones. The credit can range from $2,400 to $9,600 per qualifying employee depending on the target group and hours worked.

The critical requirement: the employer must submit IRS Form 8850 to the state workforce agency within 28 days of the employee's start date. If you hired qualifying employees during the year and did not submit Form 8850, you may have already missed the window for those hires. For employees you plan to hire before year-end, pre-screen candidates and submit the form promptly.

Energy Efficiency Credits

Multiple federal energy-related tax credits are available to Texas businesses:

• Section 179D (Energy Efficient Commercial Buildings Deduction): Available for commercial building owners who install qualifying energy-efficient systems including HVAC, lighting, and building envelope improvements. The deduction can be up to $5 per square foot for buildings meeting the highest efficiency standards.
• Investment Tax Credit (ITC) for solar: Businesses that install solar energy systems can claim the ITC, which provides a percentage of the system cost as a direct tax credit. Systems must be placed in service before December 31 to qualify for the current year.
• Section 45L (Energy Efficient Home Credit): Available to builders and developers of qualifying energy-efficient residential properties. Guide to Texas energy incentives.

Bonus Depreciation and Section 179 Expensing

While not technically tax credits, bonus depreciation and Section 179 expensing allow Texas businesses to accelerate deductions for qualifying equipment and property purchases. If you are considering major equipment purchases, acquiring and placing the equipment in service before December 31 can generate significant tax benefits for the current year. Note that bonus depreciation percentages have been phasing down in recent years — check current rates before making purchasing decisions based on depreciation benefits.

Texas Franchise Tax Credits

Texas businesses subject to the franchise tax can reduce their liability through several credit programs:

• Texas R&D Tax Credit: A state-level credit modeled on the federal R&D credit. Qualifying activities and expenses must occur within Texas. Guide to franchise tax credits.
• Clean Energy Credits: Credits related to qualifying clean energy projects and investments.
• Temporary Credit for Business Loss Carryforward: Available to businesses with qualifying losses from prior periods.

Utility and Local Incentives with Year-End Timing

Several Texas utility and local incentive programs operate on calendar year or fiscal year budgets that may affect year-end timing:

• Utility rebates: Texas utilities including Oncor, CenterPoint, CPS Energy, and Austin Energy offer rebates for energy efficiency improvements. Some programs have annual budget allocations that reset at the end of their fiscal year.
• Property tax abatements: If you are negotiating a property tax abatement with a city or county, the timing of the agreement relative to the tax year affects when benefits begin.

Year-End Tax Planning Checklist

1. Document R&D activities. Review the year's development, engineering, and testing activities. Document qualifying expenses including wages, supplies, and contract research before records become stale.
2. Verify WOTC submissions. Confirm that Form 8850 was submitted for all qualifying new hires within the 28-day window. Identify any remaining hiring opportunities before December 31.
3. Evaluate equipment purchases. If capital expenditures are planned for early next year, consider whether accelerating them into the current year generates favorable depreciation treatment.
4. Review energy improvements. Confirm that any energy efficiency improvements placed in service this year qualify for applicable credits and that documentation requirements are met.
5. Check franchise tax credit eligibility. Consult with your tax advisor about Texas franchise tax credits, including the state R&D credit and any available carryforward credits.
6. File for utility rebates. Submit any pending utility rebate applications before program budget resets.

Bottom Line

Year-end tax planning is not just for large corporations. Texas small and mid-size businesses can access meaningful federal and state tax credits for research activities, hiring from targeted groups, energy improvements, and equipment purchases. The common thread is that qualifying activities must typically occur — and be documented — before December 31. Waiting until tax filing season to evaluate these credits often means missing opportunities that could have reduced your tax liability.

Not sure which programs may fit your business? Our free screening report checks your business against 150+ verified programs — grants, tax credits, loans, and incentives — and shows you which ones may match. Start your free screening →