Startups and tech firms in Texas can claim two separate R&D tax credits , one from the IRS and one from the Texas Comptroller. But can you claim both? What’s the difference, and how do you avoid missing thousands in refunds or offset credits in 2025? Let’s break it down.
What is the Federal R&D Credit?
The Federal Research & Development Tax Credit under IRC §41 provides a dollar-for-dollar credit against income tax or payroll tax (for qualified small businesses).
Federal R&D Credit Summary:
- Available for U.S.-based innovation expenses
- Applies to wages, contract research, supplies, and cloud services
- Claimed using:
- Form 6765 (Credit for Increasing Research Activities)
- Filed with Form 1120, 1120S, or 1065
For qualified startups, the credit can offset up to $500,000 in employer payroll taxes annually.
What is the Texas R&D Franchise-Tax Credit?
Texas offers its own R&D credit against the state franchise (margin) tax, governed by Texas Tax Code §171.651–171.668.
Key Features:
- Applies to qualified research conducted in Texas under IRC §41 definitions
- Credit equals:
- 5% of qualified research expenses (QREs) over a base amount, OR
- 2.5% of QREs if the business also claims a Texas sales tax exemption for R&D equipment
- Unused credit can be carried forward for 20 years
- Must be claimed on Texas Franchise Tax Report using Form 05-178
Can You Claim Both Credits?
Yes , Texas allows a separate R&D credit even if the federal credit is claimed.
However:
- Expenses used for the federal credit can also be used for the Texas credit, but no double benefit is allowed within the same credit.
- You must maintain documentation separately for each filing.
Important: Texas credits cannot reduce franchise tax below zero and cannot be refunded, but they can carry forward.
Example: AI Startup in Austin
Company: NeuralEdge LLC
2024 QREs (Texas-based): $800,000
Base amount (3-year avg): $600,000
Excess QREs: $200,000
Texas Franchise Tax Credit:
- $200,000 x 5% = $10,000 credit
- Claimed on Form 05-178 and offset against 2025 margin tax liability
Federal Credit (simplified):
- Approx. 10% of excess QREs
- $20,000 (claimed via Form 6765 and possibly offset against 1120S taxes or payroll taxes via Form 941)
Result: The company saves $30,000 total in combined state and federal credits.
Step-by-Step: Claiming Both Credits in 2025
Federal R&D Credit (IRS):
- Calculate QREs based on qualified wages, supplies, contractors
- Complete Form 6765
- Attach to your federal return (Form 1120, 1120S, or 1065)
- For payroll offset, apply to Form 941 (quarterly)
Texas R&D Franchise Credit:
- Identify Texas-based QREs
- Complete Form 05-178
- Submit with Franchise Tax Report (Form 05-158-A or 05-163)
- Track unused credit for 20-year carryforward
Conclusion
Texas businesses engaged in qualified research can benefit from both federal and state R&D credits , but only if filings are done correctly and timely. The IRS offers cash refunds or payroll offsets, while Texas provides a franchise tax credit with long-term value. With careful planning, you can significantly reduce your tax burden on both fronts.
Call to Action
Schedule a call with Anshul Goyal, CPA, EA, FCA to assess your eligibility for both federal and Texas R&D tax credits. We help AI startups, tech firms, and product-based businesses maximize R&D incentives with audit-proof documentation.
Disclaimer:
This blog is for educational purposes only. Eligibility for R&D credits under IRC §41 and Texas Tax Code §171.651 depends on proper documentation, legal interpretations, and business structure. Please consult a qualified tax advisor before filing.
Top 5 High-Searched FAQs
1. Can I claim both Texas and federal R&D credits?
Yes. Both are independent but based on similar definitions under IRC §41.
2. What forms are needed for the Texas R&D credit?
Form 05-178, submitted with the Texas Franchise Tax Report.
3. Is the Texas R&D credit refundable?
No. But it can offset tax and carry forward for up to 20 years.
4. Can startups claim federal R&D against payroll tax?
Yes. Up to $500,000 annually via Form 6765 and applied to Form 941.
5. What counts as qualified research in Texas?
The same IRC §41 definition applies , includes innovation-related wages, supplies, and research contracts.
About Our CPA
Anshul Goyal, CPA, EA, FCA is a U.S.-licensed CPA, IRS-authorized Enrolled Agent, and cross-border tax expert advising AI firms, SaaS startups, and R&D-driven companies in Texas. With deep knowledge of IRC §41 and Texas franchise tax code, he helps businesses claim state and federal tax credits with confidence.