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In October 2021, Texas made significant changes to its state research and development (R&D) credit. These amendments to 34 TAC Section 3.599 reflect the Texas Comptroller’s interpretation of IRC §41 and include several departures from the federal R&D tax credit regulations. The changes are retroactive to January 1, 2014, as well as being applicable prospectively. 

The most significant modifications are as follows: 


A taxpayer cannot include in qualified research expenditures the cost of any tangible personal property that was excluded from Texas sales tax, such as inventory or costs of goods manufactured. 

Services & Design

The amendments specifically exclude from the definition of business component any service provided to a customer. In addition, the new rules exclude design as a business component, although the structure pertaining to the design may still be considered a business component. 


The state has laid out more rigorous criteria in determining if a taxpayer used systematic trial and error methodology in its process of experimentation and indicated it would consider such factors as whether testing continued once a single result was found, whether all results were evaluated, and whether there were written procedures for evaluation. The amendments also specifically identify nonexperimental methods, including simple trial and error and brainstorming, that should be excluded from consideration.


A taxpayer can no longer include in qualified expenditures any research activities related to internal-use software. In addition, the amendments include a detailed list of software development activities that are not likely to qualify under the new rules, such as the development of functional enhancements to existing products or the development of embedded applications.  

Illustrative Examples

The new rules provided lengthy definitions and dozens of illustrative examples. These all give further insight into the state’s intentions when examining returns and enforcing the changes. 


The revisions to the Texas R&D tax credit reflect some substantial departures from the federal definitions for qualified research activities and expenditures. The new rules are much more specific and going forward, taxpayers may need to make changes in documenting and calculating their state credit. Administratively, there may be challenges in tracking expenses now that state and federal qualifications differ. However, many companies can still qualify for the state credit despite the new complexities. 

For more information on navigating the new Texas regulations, reach out to a BKD Trusted Advisor™ on our R&D tax credit team or submit the Contact Us form below.

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