Texas is famous for having no state income tax, and many business owners assume that means there are no meaningful tax credits available. That assumption is wrong. While Texas does not have a personal or corporate income tax, the state's franchise tax system includes credits, and federal tax credits are fully available to Texas businesses. Together, these credits can meaningfully reduce your effective tax burden.
This guide covers every significant Texas business tax credit available in 2026, including state franchise tax credits and federal credits that Texas businesses can claim.
Understanding the Texas Franchise Tax
The Texas franchise tax (also called the margin tax) is the primary business tax in Texas. It applies to most entities doing business in the state, including corporations, LLCs, partnerships, and other legal entities. Key features:
- Tax rate: 0.375% for qualifying wholesalers and retailers; 0.75% for all other businesses
- No-tax-due threshold: Businesses with total revenue at or below $2.47 million (for reports due in 2026) owe no franchise tax, though they must still file
- Tax base: Calculated on the lesser of total revenue minus cost of goods sold, total revenue minus compensation, 70% of total revenue, or total revenue minus $1 million
Several credits can reduce your franchise tax liability, and these are often overlooked by Texas business owners.
Texas Franchise Tax Credits
Research and Development Tax Credit (Franchise Tax)
Texas offers a franchise tax credit for qualified research activities conducted in Texas. The credit equals the difference between the qualifying research expenses for the current period and 50% of the average qualifying research expenses for the three preceding periods. This credit mirrors the structure of the federal R&D credit but applies against the franchise tax.
Qualifying activities include developing new products, improving existing products, developing or improving manufacturing processes, and developing new software. Many businesses underutilize this credit because they do not realize that routine product improvements and process optimization often qualify.
Temporary Credit for Business Loss Carryforward
Businesses that experienced a net operating loss in prior periods may be able to carry forward a credit against the franchise tax. The specific rules and carryforward periods depend on the report year and the circumstances of the loss. Consult with your tax advisor about whether your business has unused loss carryforwards.
Federal Tax Credits for Texas Businesses
While Texas has no state income tax, Texas businesses still file federal income tax returns and can claim all available federal tax credits. Here are the most important federal credits for Texas businesses:
Research and Development Tax Credit (Federal)
The federal Research and Development Tax Credit (IRC Section 41) is one of the most valuable and underused credits available to businesses. It provides a credit for qualified research expenses including wages for employees performing qualified research, supplies used in research, and contract research expenses.
Key points for Texas businesses:
- The credit can be worth 6-8% of qualifying research expenses
- Small businesses (under $5 million in gross receipts) can apply the credit against payroll taxes instead of income taxes
- Qualifying activities are broader than most businesses realize — they include developing new products, improving existing products, developing software, improving manufacturing processes, and experimenting with new materials
- The credit can be carried forward for up to 20 years
Work Opportunity Tax Credit (WOTC)
The WOTC provides a tax credit to employers who hire workers from specific target groups, including:
- Veterans (including disabled veterans)
- SNAP recipients
- Ex-felons
- Long-term unemployed individuals
- Designated community residents
- Vocational rehabilitation referrals
- Summer youth employees from empowerment zones
Credits range from $2,400 to $9,600 per qualifying employee depending on the target group and hours worked. For Texas businesses with significant hiring activity, WOTC can provide meaningful savings. The credit is administered through the Texas Workforce Commission, which certifies eligible workers.
Disabled Access Tax Credit
Small businesses (under $1 million in revenue or fewer than 30 employees) can claim a credit for expenses incurred to comply with the Americans with Disabilities Act. The credit covers 50% of eligible access expenditures between $250 and $10,250, for a maximum annual credit of $5,000. Qualifying expenses include removing architectural barriers, providing accessible formats, and acquiring adaptive equipment.
Energy Tax Credits
Federal energy tax credits available to Texas businesses include:
- Investment Tax Credit (ITC): A credit for installing solar energy systems and other qualifying renewable energy equipment. The credit percentage varies based on the technology and installation date.
- Energy Efficient Commercial Buildings Deduction (179D): Provides an accelerated deduction for energy-efficient improvements to commercial buildings, including lighting, HVAC, and building envelope improvements.
- Alternative fuel and electric vehicle credits: Credits for commercial clean vehicles and alternative fuel infrastructure.
Employee Retention Credit Legacy
While the Employee Retention Credit (ERC) program has ended for new claims, businesses that have already filed may still be processing claims. If you filed an ERC claim that has not been resolved, work with your tax advisor on the status. The IRS has been processing a backlog of claims with increased scrutiny.
Property Tax Exemptions and Abatements
While not technically "tax credits," Texas property tax exemptions and abatements function similarly by reducing your tax burden:
- Freeport Exemption: Eliminates property tax on goods in transit (held 175 days or fewer before being shipped out of state).
- Manufacturing equipment sales tax exemption: Manufacturing equipment is exempt from state and local sales tax.
- Local property tax abatements: Many cities and counties offer negotiated abatements for businesses making capital investments.
- Enterprise Zone refunds: Sales and use tax refunds for businesses creating jobs in designated zones.
How to Maximize Your Tax Credits
- Audit your current credits: Work with your CPA to review which credits you are currently claiming and which you may be missing.
- Track R&D activities: If you develop or improve products, processes, or software, document these activities for R&D credit claims.
- Screen WOTC eligibility for new hires: Integrate WOTC screening into your hiring process. The Texas Workforce Commission can help.
- Evaluate energy improvements: Energy-efficient upgrades can provide both operational savings and tax credits.
- Consider the franchise tax R&D credit: If you conduct qualifying research in Texas, you may be able to reduce both your federal and franchise tax liability.
Find Credits and Programs That May Fit Your Business
Tax credits are just one piece of the government funding puzzle. Texas businesses also have access to grants, loans, and incentive programs that can provide additional financial benefits.
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 →