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VideoFrom 50% to Zero: How Stacking Texas Research Tax Credits Can Eliminate Franchise Tax Due
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New Comptroller guidance confirms that Texas’ three generations of Research Tax Credits (RTCs) — Subchapter O, M and T — are each capped separately at 50% of tax due and not capped together. For taxpayers holding older RTC carryforwards, that distinction can be the difference between a partial offset and a $0 franchise tax liability.
Texas taxable entities that have generated RTCs under more than one version of the state’s franchise tax RTC statute now have clear guidance on a question that has quietly complicated franchise tax filings for years: When a taxpayer holds RTC carryforwards from multiple statutory regimes, how much of its current-year franchise tax liability can those credits collectively offset?
In an April 15, 2026, policy memorandum, STAR Accession No. 202604001M, the Comptroller’s Tax Policy Division answered that question, concluding that multiple RTC vintages can collectively offset more than 50% of a taxpayer’s franchise tax liability. The guidance is more taxpayer-favorable than many practitioners assumed.
Three Generations of Texas RTCs
Texas has enacted three successive versions of its franchise tax Research Tax Credit, each with its own repeal date and carryforward window:
- Subchapter O: The original RTC was repealed effective January 1, 2008. Remaining Subchapter O carryforwards expire no later than December 31, 2027, based on the report’s original due date.
- Subchapter M: The revised RTC was repealed January 1, 2026. Remaining Subchapter M carryforwards may continue for up to 20 consecutive reports following the initial report year.
- Subchapter T: The current regime is governed by Tax Code Section 171.9201 through 171.9213, under which current-year credits and new carryforwards may be carried forward for up to 20 consecutive reports.
Because Subchapter M expired as Subchapter T took effect, many Texas taxpayers now find themselves holding Subchapter M carryforwards alongside a first-year Subchapter T credit, as well as aging Subchapter O carryforwards.
The 50% Limitation: Per Credit, Not Per Taxpayer
Texas Tax Code Section 171.9207 and 34 Texas Administrative Code Rules 3.593(e)(2) and 3.599(k) limit each RTC credit, whether a current-year credit or a credit carryforward, to 50% of the franchise tax due for the report, measured before any other applicable tax credits. On the surface, a 50% limitation sounds like it should cap the total RTC benefit to half of a taxpayer’s liability.
The Comptroller’s memo makes clear that the limitation does not apply that way. Instead, the 50% cap applies separately to each RTC vintage, and each vintage’s cap is measured against the same original, precredit tax due, rather than the remaining balance after another RTC vintage has been applied. The caps therefore do not stack against a shrinking base. They are independent 50% ceilings measured against the same original tax due amount.
The practical result is that carryforward and current-year RTCs from different Subchapters can, in combination, offset more than 50% of a taxpayer’s liability. Where two vintages each reach their full 50% ceiling, the combined effect can reduce franchise tax due to zero.
The Comptroller’s own example in the memo illustrates this result: A taxpayer with $10,000 tax due uses $1,000 of Subchapter O, $5,000 of Subchapter M and $2,000 of Subchapter T credits to reduce its tax due to $2,000. The three credit vintages offset 80% of the original liability, well beyond any single 50% ceiling.
Required Ordering of Credits
Texas Tax Code Section 171.9208 requires taxpayers with more than one RTC vintage available to apply the credits in a specific sequence:
1. Subchapter O carryforwards
2. Subchapter M carryforwards
3. Subchapter T carryforwards
4. Subchapter T current-year credits
Each vintage’s carryforward must be exhausted before the next vintage in line is applied, and current-year Subchapter T credits are used last. For most taxpayers in Subchapter T’s first report year, this means a simple two-step sequence: apply any remaining Subchapter M carryforward first, followed by the current-year Subchapter T credit.
How RTCs Interact with Other Franchise Tax Credits
The same memo also resolves a related sequencing question involving four other franchise tax credits: the Clean Energy Project Credit, the Historic Structure Credit, the Housing Developments Credit and the new Strong Families Credit. Each of these credits is statutorily limited to the tax due remaining after all other applicable credits. Because RTC credits are calculated based on tax due before any other credits, RTC credits must be calculated and applied first, ahead of those four credits. The other credits are then applied in the order their enabling statutes were adopted.
For taxpayers claiming both RTC credits and one of these other incentive credits in the same report, sequencing matters for more than just the current year’s liability. If RTC carryforwards fully absorb the current-year’s tax due, credits such as the Historic Structure or Clean Energy Project credit will have no tax due left to offset in that report. That does not mean a benefit is lost. These credits generally carry their own multiyear carryforward windows, so unused amounts can carry forward to a future report.
Sequencing the RTC vintages to maximize current-year utilization, rather than reflexively splitting the offset across credit types, may produce a better long-term result. However, the right approach depends on each credit’s remaining carryforward period and the taxpayer’s multiyear projections.
What This Means for Taxpayers
For Texas taxpayers carrying RTC credits across the Subchapter M to Subchapter T transition, this guidance opens a planning opportunity that may be overlooked when RTC carryforwards are evaluated on a vintage-by-vintage basis without considering the aggregate result:
- Taxpayers with substantial Subchapter M carryforwards approaching the end of Subchapter M’s repeal-driven runway should confirm that those amounts are sequenced ahead of current-year Subchapter T credits rather than blended or underutilized.
- Taxpayers generating a first-year Subchapter T credit alongside legacy Subchapter M or even Subchapter O carryforwards should model the combined offset before assuming that a single 50% ceiling caps total RTC benefit for the report.
- Taxpayers should independently substantiate credit amounts for each vintage, maintain contemporaneous documentation for Subchapter M-era qualified research expenses and retain Form 6765 support with proper Texas apportionment for Subchapter T. Remaining carryforward balances and expiration dates should also be tracked separately by vintage.
The key takeaway is that a Texas taxpayer is not limited to a single 50% offset simply because it holds RTC credits from more than one statutory era. Properly sequenced, a Subchapter M carryforward and a current-year Subchapter T credit, each independently capped at 50% of the same precredit tax due, can combine to eliminate franchise tax due entirely. Taxpayers and their advisors should also revisit prior-period RTC utilization in light of this guidance. Credits that were previously underapplied based on a more conservative interpretation of the 50% rule may still be available.
Weaver Can Help
If your organization holds RTC carryforwards from more than one Subchapter, this guidance may require a review of your current franchise tax filing position and prior-period RTC utilization.
Weaver’s tax credits and incentives team can assess how RTCs across statutory vintages have been identified, substantiated and sequenced as part of the annual franchise tax compliance process. We can also evaluate whether current filings reflect the Comptroller’s guidance and whether prior reports require further review. Contact us today.
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