Texas is famous for having no state income tax, and that extends to businesses as well — there is no corporate income tax in Texas. However, Texas does impose a franchise tax (also called the margin tax) on most businesses operating in the state. What many business owners do not realize is that the Texas franchise tax system includes several valuable credits that can significantly reduce your tax liability.
This guide covers the Texas franchise tax credits for businesses available in 2026, including how each credit works, who qualifies, and how to claim them.
How the Texas Franchise Tax Works
Before diving into credits, it helps to understand the franchise tax itself. The Texas franchise tax applies to most entities doing business in Texas, including corporations, LLCs, partnerships, and other entities with limited liability. Sole proprietorships and general partnerships where all partners are natural persons are generally exempt.
The tax is calculated on your business's "margin," which is your total revenue minus either cost of goods sold, compensation, 30% of total revenue, or $1 million (whichever method gives you the lowest margin). The tax rate is 0.375% for retail and wholesale businesses and 0.75% for all other businesses.
Important threshold: businesses with total revenue of $2.47 million or less (as of the most recent threshold) owe no franchise tax. Businesses with revenue between the threshold and $20 million can use an EZ computation method. Credits apply to the calculated tax amount, so they directly reduce what you owe.
Texas Research and Development Tax Credit
The Texas R&D tax credit is one of the most valuable franchise tax credits available. It provides a credit against franchise tax for qualified research expenditures conducted in Texas.
How It Works
The Texas R&D credit is based on the federal research and experimentation tax credit (IRC Section 41) but applied against the Texas franchise tax rather than federal income tax. The credit equals a percentage of qualified research expenditures incurred in Texas. Texas allows businesses to choose between the regular credit method and the alternative simplified credit method.
What Qualifies
Qualified research expenditures include wages paid to employees conducting qualified research, supplies used in research, and contract research expenses (at 65% of amounts paid). The research must be conducted in Texas to qualify for the state credit. Activities that qualify include developing new products, improving manufacturing processes, developing new software, improving existing products or processes, and developing new formulations or materials.
Who Should Consider It
Any Texas business that spends money on research and development activities should evaluate this credit. It is particularly valuable for technology companies, manufacturers developing new processes, pharmaceutical and biotech companies, engineering firms, and software development companies. Many businesses conduct qualifying R&D activities without realizing it — activities like developing custom software, improving manufacturing yields, and testing new materials can all qualify.
Clean Energy Credits
Texas businesses investing in clean energy may access credits at both the state and federal level. While Texas does not have a standalone clean energy franchise tax credit as of 2026, businesses can benefit from several related programs:
Federal Investment Tax Credit (ITC)
Texas businesses installing solar, wind, geothermal, or other qualifying clean energy systems can claim the federal Investment Tax Credit against their federal tax liability. The ITC provides a credit of up to 30% of the cost of qualifying clean energy installations, with bonus credits available for projects meeting domestic content, energy community, or low-income requirements.
Federal Production Tax Credit (PTC)
For businesses generating renewable energy (particularly wind energy, which Texas leads the nation in), the Production Tax Credit provides a per-kilowatt-hour credit for electricity generated from qualifying renewable sources during the first ten years of a facility's operation.
Property Tax Exemptions for Renewable Energy
Texas provides a property tax exemption for the appraised value of solar and wind energy devices installed on business property. This means the added property value from installing renewable energy equipment is not subject to property tax, providing ongoing savings.
REAP Grants
Rural Texas businesses can combine federal tax credits with USDA REAP grants for renewable energy installations, effectively covering a significant portion of project costs. See our guide to rural business grants in Texas.
Veteran Employment Tax Credit
Texas businesses that hire veterans may qualify for tax credits at the federal level through the Work Opportunity Tax Credit (WOTC). While Texas does not have a separate state-level veteran employment franchise tax credit, the federal WOTC provides a credit of up to $9,600 per qualifying veteran hired, depending on the veteran's circumstances and hours worked.
How WOTC Works for Veterans
The WOTC provides credits for hiring individuals from targeted groups, including veterans. The credit amount depends on the veteran's category:
- Short-term unemployed veterans: Credit of up to $2,400 for veterans unemployed for at least 4 weeks.
- Long-term unemployed veterans: Credit of up to $5,600 for veterans unemployed for at least 6 months.
- Disabled veterans: Credit of up to $4,800 for service-connected disabled veterans unemployed for less than 6 months, or up to $9,600 for disabled veterans unemployed for 6 months or more.
To claim the WOTC, employers must obtain certification from the Texas Workforce Commission by submitting IRS Form 8850 within 28 days of the employee's start date. More about veteran business programs in Texas.
Other Franchise Tax Credits and Deductions
Enterprise Zone Credits
Businesses located in designated Texas Enterprise Zones can receive state sales and use tax refunds for equipment and machinery purchases. While this is technically a refund rather than a franchise tax credit, it operates as a meaningful tax benefit — up to $2,500 per job created within the zone.
Temporary Credit for Business Loss Carryforwards
Texas allows certain businesses to apply prior year business losses against franchise tax liability under specific circumstances. The rules around loss carryforwards have changed over time, so consult with a tax professional to determine whether this applies to your situation.
Solar and Wind Property Tax Exemptions
As mentioned above, the property tax exemption for renewable energy devices is a significant ongoing benefit. This exemption applies to both commercial and residential properties and covers solar panels, wind turbines, and other qualifying renewable energy systems.
Federal Credits Available to Texas Businesses
Because Texas has no state income tax, federal tax credits are particularly important for Texas businesses. Key federal credits beyond R&D and clean energy include:
- Work Opportunity Tax Credit: Credits for hiring from targeted groups including veterans, ex-felons, SNAP recipients, and long-term unemployed individuals.
- Disabled Access Credit: Credit of up to $5,000 for small businesses that incur expenses to provide access to persons with disabilities.
- Small Business Health Care Tax Credit: Credit for small employers that provide health insurance to employees.
- Employer-Provided Child Care Credit: Credit for businesses that provide child care facilities or services for employees.
For a broader overview of business tax credits in Texas, see our complete guide to Texas business tax credits.
How to Claim These Credits
- Track qualifying expenses throughout the year: Do not wait until tax time to identify qualifying activities. Maintain records of R&D expenditures, veteran hires, energy investments, and other qualifying activities as they occur.
- Work with a qualified tax professional: Tax credits have specific documentation requirements and calculation methods. A CPA or tax attorney experienced with Texas franchise tax and federal credits can ensure you claim the maximum amount.
- Consider a cost segregation or R&D study: For larger businesses, a formal R&D tax credit study or cost segregation study can identify qualifying expenditures you may have missed.
- File WOTC certifications promptly: The 28-day deadline for IRS Form 8850 is strict. Submit certifications for qualifying new hires immediately after their start date.
Bottom Line
Texas franchise tax credits can meaningfully reduce your business tax liability, particularly the R&D credit for businesses conducting qualifying research and development in Texas. Combined with federal credits for clean energy investment, veteran employment, and other activities, Texas businesses have access to a robust set of tax incentives despite the state's no-income-tax environment.
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 →