Introduction and Macroeconomic Context

The economic landscape of Fort Worth, Texas, has evolved dramatically over the past century and a half. Originally established as an Army outpost near the Clear Fork of the Trinity River in 1849 to mark the western Texas frontier, the city leveraged its geographic positioning and expanding rail connections to become a central hub for the livestock trade, earning the enduring moniker “Cowtown”. The arrival of the Texas Pacific Railway in 1876, followed by major investments from the Armour and Swift meatpacking companies in 1902, catalyzed the city’s early population boom. However, the trajectory of Fort Worth’s economic development did not stall at agriculture and meatpacking. Through deliberate public-private partnerships, strategic defense investments during World War II, and the aggressive pursuit of technological infrastructure, the city has transformed into a globally recognized nexus for aerospace and defense, unconventional energy extraction, life sciences, autonomous logistics, and advanced rail engineering.

Today, the Dallas-Fort Worth metropolitan statistical area (MSA), home to over 8.1 million residents, leads the nation in employment and population growth, supported by a diverse agglomeration of high-tech industries. The regional economy generates an estimated $535 billion in gross domestic product, a figure that rivals the economic output of entire nations. To sustain this competitive advantage and drive further capital investment, businesses operating within Fort Worth must navigate a complex array of federal and state tax incentives designed to subsidize the operational and financial risks inherent in technological innovation. The most potent of these mechanisms is the Research and Development (R&D) tax credit.

Recent legislative overhauls at both the federal and state levels have fundamentally altered the mechanics of claiming these credits. Federally, the One Big Beautiful Bill Act (OBBBA) of 2025 has reinstated the immediate expensing of domestic research expenditures, providing critical relief from the restrictive amortization rules previously imposed by the Tax Cuts and Jobs Act. Simultaneously, the Texas Legislature enacted Senate Bill 2206, which permanently extends the state’s franchise tax credit, significantly increases the statutory credit rates, and repeals the longstanding sales and use tax exemption for R&D equipment.

This study delivers a granular examination of these statutory requirements, administrative guidelines, and prevailing case law. Utilizing five distinct industry case studies specific to Fort Worth, the analysis demonstrates how historical development has birthed modern technical challenges that qualify for substantial federal and state tax subsidization.

The United States Federal R&D Tax Credit Framework

The federal credit for increasing research activities, codified under Internal Revenue Code (IRC) Section 41, was established through the Economic Recovery Tax Act of 1981 to incentivize domestic innovation. The provision generally provides a dollar-for-dollar reduction in a taxpayer’s income tax liability based on a percentage of qualified research expenses (QREs) that exceed a calculated base amount. Despite its broad application across various engineering and scientific disciplines, the statutory requirements for eligibility, expense calculation, and documentation are notoriously strict and subject to intense scrutiny by the Internal Revenue Service (IRS).

The Statutory Four-Part Test

To qualify for the federal R&D tax credit, an activity must satisfy a rigorous four-part test defined in IRC Section 41(d). All four criteria must be met independently for each “business component,” which the statute defines as any product, process, computer software, technique, formula, or invention held for sale, lease, or license, or used by the taxpayer in a trade or business.

Excluded Activities and the “Funded Research” Limitation

Even if an engineering or scientific activity meets the four-part test, it may still be disqualified under the statutory exclusions outlined in IRC Section 41(d)(4). These exclusions prohibit taxpayers from claiming the credit for research conducted after the beginning of commercial production, the adaptation of an existing business component to a particular customer’s requirement, the duplication of an existing business component, routine surveys and studies, and research conducted outside the physical boundaries of the United States.

A particularly complex and highly litigated exclusion is “funded research” under Section 41(d)(4)(H). Under Treasury Regulation Section 1.41-4A(d), research is considered funded—and therefore ineligible for the federal credit—if the taxpayer’s payment for the research is not contingent on the success of the research, or if the taxpayer does not retain substantial rights to the results of the research. Recent federal case law highlights the intense judicial scrutiny applied to this exclusion, particularly for contractors and engineering firms.

In Meyer, Borgman & Johnson, Inc. v. Commissioner (2024), the Eighth Circuit upheld the Tax Court’s decision denying research credits to a structural engineering firm. The court ruled that because the firm operated under fixed-fee contracts where payment was not explicitly contingent upon the success of the novel structural designs, the firm did not bear the true financial risk of developmental failure, rendering the research “funded.” Conversely, in Smith v. Commissioner (2024), involving an architectural firm, and System Technologies Inc. v. Comm’r (2024), involving an industrial finishing systems manufacturer, the United States Tax Court denied the IRS’s motions for summary judgment on the funded research issue. In these rulings, the court indicated that a highly nuanced analysis of local state law, specific contractual warranties, and the actual economic risk borne by the taxpayer is required to determine if payment is genuinely contingent upon successful research. Fixed-price contracts do not automatically equate to funded research if the contractor must bear the cost of redesign and remediation in the event of technical failure.

Tax Accounting Changes: Section 174 and the OBBBA of 2025

The Tax Cuts and Jobs Act (TCJA) of 2017 drastically altered the landscape of R&D tax accounting, prioritizing revenue generation over immediate innovation subsidization. Effective for tax years beginning after December 31, 2021, the TCJA mandated that specified research or experimental (SRE) expenditures could no longer be immediately deducted in the year incurred. Instead, taxpayers were required to capitalize and amortize these costs over five years for domestic research and fifteen years for foreign research under a revised IRC Section 174. This capitalization requirement artificially inflated the taxable income for highly innovative companies, severely impacting cash flow and leading to widespread industry pushback across all sectors.

The legislative remedy arrived with the passage of the One Big Beautiful Bill Act (OBBBA) of 2025. This act introduced new IRC Section 174A, which permanently restores the ability of taxpayers to fully expense domestic R&E expenditures in the tax year they are paid or incurred, effective for taxable years beginning after December 31, 2024. This change recouples the immediate tax deduction with the generation of the Section 41 credit, creating a highly favorable environment for capital deployment. However, the OBBBA maintains the strict TCJA treatment for offshore activities; foreign research costs must still be capitalized and amortized over 15 years. The legislation also provides critical transition rules allowing taxpayers to elect to accelerate the deduction of unamortized domestic R&E costs incurred between 2022 and 2024, offering immediate liquidity relief.

Substantiation, Form 6765, and IRS Scrutiny

The evidentiary burden placed upon taxpayers claiming the federal credit has intensified significantly. In the landmark case George v. Commissioner (T.C. Memo. 2026-10), the United States Tax Court unequivocally reinforced that satisfying the four-part test requires robust, contemporaneous documentation. The court wholly rejected reconstructed narratives and post-hoc time estimates assembled years later for the sole purpose of a tax study. Taxpayers must maintain systematic records proving technical uncertainty, the evaluation of alternatives, and the exact mapping of employee time to specific business components as the research occurs.

Furthermore, the IRS has revamped Form 6765 (Credit for Increasing Research Activities) for the 2025 tax year, mandating extensive qualitative data reporting directly on the original return. Under the newly introduced Section G, taxpayers must explicitly identify the total number of business components generating QREs, select detailed software categories (distinguishing between internal-use, dual-function, or non-internal use software), and disclose officers’ wages tied to research activities. This structural change is designed to identify audit risks immediately and shifts the heavy burden of qualitative proof from the audit defense phase directly to the initial compliance and filing phase.

The Texas State R&D Tax Credit: The SB 2206 Overhaul

In a strategic bid to maintain its competitive edge as a premier destination for corporate headquarters, advanced manufacturing, and biotechnology, the Texas Legislature enacted Senate Bill (SB) 2206, signed into law by Governor Greg Abbott on June 17, 2025. Historically, the Texas tax code offered innovative taxpayers a choice: they could elect to claim a sales and use tax exemption on the purchase, lease, or rental of depreciable tangible personal property directly used in qualified research (under Tax Code Sec. 151.3182), or they could claim a franchise tax credit based on qualified research expenses (under Subchapter M of Chapter 171). A taxpayer could not claim both incentives for the same period. Furthermore, the Subchapter M franchise tax credit was slated to expire entirely on December 31, 2026. SB 2206 fundamentally restructures this dual-incentive system, streamlining administration while significantly boosting the financial reward for conducting research within the state.

Elimination of the Sales Tax Exemption

Effective January 1, 2026, SB 2206 completely repeals the sales and use tax exemption for R&D equipment. Machinery, testing hardware, servers, and software purchased for R&D purposes after December 31, 2025, will be fully subject to the standard Texas sales and use tax unless another specific statutory exemption (such as the manufacturing exemption) applies. This structural shift forces capital-intensive industries—which previously relied heavily on immediate point-of-sale tax relief for multi-million-dollar equipment acquisitions—to transition their tax strategy exclusively toward the enhanced franchise tax credit.

The New Subchapter T Franchise Tax Credit

SB 2206 replaces the expiring Subchapter M credit with a permanent, significantly enhanced franchise tax credit codified under a new Subchapter T of the Texas Tax Code (Texas Tax Code §§ 171.9201-171.9213). The new credit framework applies to franchise tax studies originally due on or after January 1, 2026.

The legislation drastically increases the financial value of the credit. Texas maintains a modified version of the federal Alternative Simplified Credit (ASC) calculation methodology. Under Subchapter T, the standard credit rate is raised from 5% to 8.722% of the current year’s qualified costs that exceed the established base amount. The base amount is calculated as 50% of the average of the preceding three years’ Texas-apportioned qualified expenses. For businesses that lack a three-year history of prior qualified expenses in the state, the base rate is increased from 2.5% to 4.361% of the current year’s qualified costs. To further incentivize academic-corporate partnerships, payments made to Texas public or private higher education institutions for qualified contract research are rewarded at an enhanced rate of 10.903% (up from 6.25%).

Enhanced Federal Conformity and Administrative Simplification

Historically, the Texas Comptroller applied a definition of R&D that deliberately departed from federal standards, raising the threshold for documentation and innovation above national norms. This was particularly evident in the treatment of Internal Use Software (IUS). Prior to the recent amendments, Texas required IUS to meet an exceedingly high standard of innovation, mandating that the software be entirely unique or novel and involve significant economic risk, forcing taxpayers to conduct entirely separate qualitative analyses for state compliance.

SB 2206 streamlines this process by establishing rolling conformity to the Internal Revenue Code. The legislation explicitly ties the Texas definition of “qualified research expense” directly to the amount reported by the taxable entity on Line 48 of federal IRS Form 6765, limited to the portion of those expenses attributable to research physically conducted within Texas. By anchoring the state credit to the federal calculation, Texas now automatically permits the use of statistical sampling procedures authorized under IRS Revenue Procedure 2011-42. Furthermore, if the IRS accepts a taxpayer’s adjusted Accounting Standards Codification (ASC) 730 financial statement R&D costs as sufficient evidence for federal credit purposes, the Texas portion of those costs is automatically deemed sufficient for the Texas Subchapter T credit.

Refundability and Comptroller Guidance

A transformative element of Subchapter T is the introduction of a refundable credit mechanism. Previously, the Texas R&D credit was strictly non-refundable; it could only be used to offset up to 50% of the franchise tax due on a given study, with the remainder carried forward. Under the new law, eligible entities that owe no franchise tax for the period—such as businesses falling under the state’s “no tax due” revenue threshold or qualifying new veteran-owned businesses—can receive the full value of the credit as a direct cash refund, entirely bypassing the 50% liability cap. For highly profitable entities with substantial tax liability, the credit remains limited to offsetting 50% of the franchise tax due before other credits, with any unused portion eligible to be carried forward for up to 20 consecutive studies.

Despite the sweeping move toward federal conformity, the Texas Comptroller of Public Accounts retains specific interpretative authority that diverges from the IRS in nuanced areas. Administrative hearings before the State Office of Administrative Hearings (SOAH) continuously reaffirm that the burden of proof rests entirely on the taxpayer to demonstrate, by clear and convincing evidence, that a tax was erroneously collected or a credit improperly denied. Two critical policy memoranda issued on March 24, 2025, highlight the Comptroller’s strict interpretation of state statutes over federal guidelines:

1. Depreciable Property is Not a Supply QRE (Memo 202503003M): The Comptroller clarified that even if a taxpayer successfully elects to deduct the cost of depreciable property under the new federal IRC Section 174A, that expense categorically cannot be classified as a “supply” QRE under IRC Section 41 for Texas purposes. The Comptroller ruled that the statutory definition of supplies in IRC Section 41(b)(2)(C) explicitly excludes property subject to an allowance for depreciation, rendering it ineligible regardless of its treatment under Section 174.
2. Inapplicability of Federal Intra-Group Transaction Rules (Memo 202503004M): The Comptroller determined that federal intra-group transaction regulations do not apply to the Texas R&D credit. While federal law mandates that all members of a group under common control are treated as a single taxpayer for calculating the research credit, the Texas Tax Code’s definitions and rules for a “combined group” differ significantly. Consequently, the federal single-taxpayer fiction is inapplicable at the state level when determining qualified expenditures between related entities.

Fort Worth Industry Case Studies: Innovation and Tax Credit Eligibility

The following sections dissect five prominent, capital-intensive industries deeply rooted in Fort Worth’s economic history. Each case study traces the historical development of the sector within the city, details modern R&D activities specific to local operations, and evaluates how these technical endeavors meet the rigid parameters of both the federal four-part test and the new Texas Subchapter T requirements.

Aerospace and Defense Aviation: Lockheed Martin and Bell Textron

Historical Development in Fort Worth

Fort Worth’s emergence as an undisputed global powerhouse in aerospace and defense was forged in the crucible of World War II. Recognizing the strategic inland safety of Texas, the federal government constructed Air Force Plant 4 on the western edge of the city in 1942. Operated initially by Consolidated Vultee Aircraft Corporation (which later evolved into Convair, General Dynamics, and presently Lockheed Martin), the massive facility became a critical manufacturing node, producing over 3,000 B-24 Liberator heavy bombers for the Allied war effort. Following the war, the adjacent Tarrant Field was renamed Carswell Air Force Base (now Naval Air Station Joint Reserve Base Fort Worth) and became a vital Strategic Air Command station, further anchoring military aviation infrastructure to the region.

The local industry continuously reinvented itself through subsequent geopolitical eras. Air Force Plant 4 transitioned from producing the B-36 Peacemaker and B-58 Hustler to undergoing massive technological retooling in the 1970s and 1980s to manufacture the highly successful F-16 Fighting Falcon, ultimately producing over 3,600 units in Fort Worth. Concurrently, aviation pioneer Lawrence “Larry” Bell, seeking a dedicated location to mass-produce rotorcraft, relocated the manufacturing operations of Bell Helicopter from New York to Fort Worth in 1951. This established the world’s first factory explicitly designed for helicopter production, solidifying Fort Worth’s dual dominance in both fixed-wing and rotary aviation. Today, Lockheed Martin’s Aeronautics headquarters and Bell Textron’s global headquarters employ tens of thousands of highly skilled engineers and technicians in the region.

Qualified R&D Activities and Credit Eligibility

The sheer scale of iterative engineering occurring at Lockheed Martin and Bell Textron presents vast opportunities for R&D tax credit generation.

• Federal Application: Activities such as developing the advanced radar-absorbent stealth coatings for the F-35 Lightning II, writing and compiling the millions of lines of code required for modern avionics software, and engineering the complex tiltrotor mechanical linkages for Bell’s Future Long Range Assault Aircraft (FLRAA) program (the MV-75) unequivocally satisfy the federal four-part test. These efforts intend to improve functional performance and lethality (Permitted Purpose), rely on rigid principles of aerospace engineering, metallurgy, and physics (Technological in Nature), face immense initial uncertainty regarding material stress limits and aerodynamic lift profiles (Technical Uncertainty), and involve rigorous, iterative computational fluid dynamics modeling and wind tunnel testing (Process of Experimentation).
• The “Funded Research” Hurdle: A primary compliance challenge for defense contractors in Fort Worth is navigating the funded research exclusion. Under federal law, if the Department of Defense (DoD) funds the research via a cost-plus contract where the government bears the financial risk if the prototype fails to meet specifications, those specific expenditures are disqualified from the credit. However, if the engineering is conducted under firm-fixed-price contracts where Lockheed or Bell must absorb the cost of redesigning a failed component, or if the contractors invest their own Independent Research and Development (IR&D) capital prior to securing a formal government production contract, those labor and supply expenses remain highly eligible for the credit.
• Texas Application (SB 2206): Under the new Subchapter T rules, these aerospace giants will experience a significant shift in state tax strategy. Post-2025, they will no longer be able to claim immediate sales tax exemptions on the purchase of advanced manufacturing machinery, multi-axis CNC mills, and environmental testing rigs. Instead, the vast engineering wages, destructive testing supplies, and wind-tunnel contract research expenditures physically incurred in Fort Worth will flow through to Line 48 of their federal Form 6765. These state-apportioned QREs will then be multiplied by the enhanced 8.722% Texas rate. Given the immense franchise tax liabilities generated by these Fortune 500 defense contractors, meticulously tracking and maximizing the 20-year carryforward of the 50% franchise tax offset will be a critical financial mechanism to underwrite future defense platform development.

Unconventional Energy Extraction: The Barnett Shale

Historical Development in Fort Worth

The global macroeconomic landscape and geopolitical energy dynamics were fundamentally altered by technological advancements incubated directly beneath the concrete of the Dallas-Fort Worth metroplex. Geologists had mapped the Barnett Shale formation—a massive, fine-grained, organic-rich sedimentary rock layer spanning over 5,000 square miles across 25 counties—in the early 20th century. However, because the hydrocarbon reserves were trapped in extremely dense rock with virtually no natural permeability, the gas was universally deemed economically unrecoverable.

The breakthrough occurred due to the relentless experimentation and capital deployment of George P. Mitchell of Mitchell Energy. Beginning in 1981, Mitchell utilized his company as a personal geological laboratory, sinking vertical wells into the stubborn rock of the Fort Worth basin and spending 17 years and millions of dollars attempting to unlock the tight shale. The paradigm shifted in 1997 when Nick Steinsberger, an engineer at Mitchell Energy, successfully experimented with “slickwater” hydraulic fracturing. By pumping a carefully calibrated blend of high-volume water, sand proppant, and friction-reducing chemical additives into the shale under immense pressure, they were able to shatter the rock. When this slickwater technique was eventually combined with advances in horizontal drilling, it allowed a single wellbore to contact thousands of feet of reservoir rock, igniting the modern American shale gas revolution. By 2011, the Barnett was producing over 5 billion cubic feet of natural gas per day. While the Barnett is now considered a mature play, it remains a critical hub for energy corporate headquarters, midstream pipeline optimization, and advanced refracturing technology.

Qualified R&D Activities and Credit Eligibility

Modern energy firms and oilfield service companies operating in the Fort Worth basin continue to drive intense innovation in extraction efficiency, fluid chemistry, and environmental mitigation.

• Federal Application: Developing new, biodegradable chemical compositions for fracturing fluids that maintain viscosity under extreme subsurface temperatures while reducing groundwater contamination risks perfectly aligns with the four-part test. Similarly, engineering proprietary downhole telemetry sensors that can withstand corrosive, high-pressure environments, and writing complex 3D microseismic imaging software algorithms to dynamically map subsurface fracture networks in real-time are prime examples of eligible R&D. The technical uncertainty lies in the highly variable geologic anomalies of the shale, requiring continuous, iterative testing of pressure gradients, fluid dynamics, and proppant suspension (Process of Experimentation). The wages paid to petroleum engineers, geophysicists, and software developers constitute the core of these QREs.
• Geologic vs. Technological Uncertainty: Energy taxpayers must be highly precise in their documentation to distinguish between general geological exploration (which is explicitly disqualified under Section 41) and true technological development. Drilling an exploratory well merely to determine if a pocket of natural gas exists fails the process of experimentation test. However, engineering a novel steel casing design to withstand the specific compressive sheer forces of a newly mapped Barnett micro-fault line is highly qualified. The costs of tangible supplies—such as specialized drill bits or experimental chemical additives—consumed during these experimental phases can be claimed as supply QREs, provided they are not capitalized as depreciable property under the Comptroller’s strict interpretation.
• Texas Application (SB 2206): Energy firms partnering with regional universities to research carbon sequestration techniques or advanced enhanced oil recovery (EOR) methodologies can capitalize on the enhanced 10.903% Subchapter T credit rate for higher education contracts. Furthermore, as drilling intensity inherently fluctuates with volatile global commodity prices, the 20-year carryforward provision allows these firms to bank R&D credits during high-investment, low-revenue exploration phases, and subsequently deploy those credits to offset massive franchise tax liabilities during high-revenue production booms.

Life Sciences and Biotechnology: Alcon and UNTHSC

Historical Development in Fort Worth

While Fort Worth is traditionally associated with heavy industry, defense, and energy, it boasts a formidable, rapidly expanding, and deeply rooted life sciences sector. The foundation for this cluster was laid in 1945 when two visionary pharmacists, Robert Alexander and William Conner, combined the first syllables of their last names and opened a small neighborhood pharmacy called “Alcon” in Fort Worth. Identifying a critical gap in the medical market, they focused their efforts on formulating specialized, sterile ophthalmic products. In 1953, Alcon achieved a massive breakthrough by developing and patenting the DROP-TAINER® dispensing bottle, which rapidly became a global industry standard for eye care delivery. Decades of compounding innovation followed, leading to Alcon’s evolution into a multibillion-dollar global leader in eye care. Today, despite various corporate acquisitions and spin-offs (including periods under Nestlé and Novartis), Alcon’s massive operational headquarters and the William C. Conner Research Center remain firmly anchored in Fort Worth, employing thousands of researchers and technicians.

This corporate anchor is bolstered by the University of North Texas Health Science Center (UNTHSC) at Fort Worth, established originally in 1970 as the Texas College of Osteopathic Medicine. UNTHSC has evolved into a premier tier-one research institution. The university’s Acceleration Lab, established in partnership with TechFW, serves as a primary regional incubator, providing critical wet lab space, core biomedical equipment, and commercialization support for emerging biotech startups, driving the convergence of technology and biology in the region.

Qualified R&D Activities and Credit Eligibility

The life sciences and biotechnology cluster in Fort Worth engages in textbook, high-value R&D activities that are heavily subsidized by the federal tax code.

• Federal Application: Alcon’s continuous development of advanced, biocompatible intraocular lenses (IOLs) for cataract surgery, precision robotic laser platforms for refractive error correction, and novel biopolymers for contact lenses perfectly aligns with the requirements of IRC Section 41. Similarly, startups incubating at UNTHSC, such as CAGE Bio, are engineering proprietary drug-delivery platforms utilizing novel ionic liquid technology to transport large macromolecules (like insulin or siRNA) across the human skin barrier. The biological, chemical, and optical sciences inherently involve vast technical uncertainty regarding human physiological responses and compound stability. The process of experimentation takes the rigorous form of iterative laboratory compounding, extensive in-vitro testing, and highly structured, phase-based human clinical trials. Wages paid to clinical researchers, biochemists, biostatisticians, and regulatory engineers constitute massive, easily quantifiable QRE pools.
• Texas Application (SB 2206): The life sciences sector will uniquely benefit from the new structural provisions of the Texas Subchapter T franchise tax credit. Emerging biotech firms operating in UNTHSC incubators typically spend millions of dollars of venture capital on R&D over many years while generating zero gross receipts during the arduous FDA approval process. Because these startups will fall well below the state’s “no tax due” franchise tax threshold, they possess no immediate tax liability to offset. SB 2206 directly addresses this by allowing these pre-revenue entities to receive their accrued 8.722% R&D credit as a direct cash refund. This mechanism provides vital, non-dilutive liquidity back to the startups, effectively allowing the state of Texas to co-fund ongoing clinical trials and laboratory expansion.

Advanced Logistics and Autonomous Mobility: AllianceTexas

Historical Development in Fort Worth

In the late 1980s, real estate visionary Ross Perot Jr. recognized the immense logistical potential of the vast, undeveloped prairie north of Fort Worth. Partnering with the Federal Aviation Administration and the City of Fort Worth, Hillwood Development Company broke ground on the Fort Worth Alliance Airport in 1989. Designed specifically to handle heavy cargo aircraft without the congestion of commercial passenger traffic, it was billed as the world’s first dedicated industrial airport. Over the subsequent 35 years, this initial infrastructure investment spurred the growth of AllianceTexas, a 27,000-acre master-planned development that has evolved into an unparalleled global logistics hub. Generating an estimated $120 billion in cumulative regional economic impact, the inland port connects air, rail, and highway freight networks, attracting massive distribution centers for companies like Amazon, FedEx, and Walmart.

To address the future of supply chain resiliency and automation, Hillwood recently established the AllianceTexas Mobility Innovation Zone (MIZ). The MIZ serves as a first-of-its-kind, real-world commercialization ecosystem, attracting cutting-edge technology companies to test autonomous surface and air freight solutions in a heavily integrated, heavily regulated logistical environment.

Qualified R&D Activities and Credit Eligibility

The MIZ represents a dense concentration of advanced software engineering, robotics, and autonomous systems integration, pushing the boundaries of artificial intelligence.

• Federal Application: Companies operating within the MIZ are heavily engaged in qualified software and hardware development. For example, Aurora Innovation utilizes the zone to test autonomous Class 8 semi-trucks on commercial routes to El Paso, while Clevon tests last-mile robotic couriers, and Manna tests drone delivery algorithms. The R&D involves training complex machine learning models to instantly process massive data streams from lidar, radar, and optical sensors to safely navigate unpredictable traffic and harsh weather conditions. The algorithms must constantly evaluate alternatives to resolve technical uncertainty regarding object detection and pathing logic, perfectly satisfying the process of experimentation test.
• Internal Use Software (IUS) vs. Commercial Software: Taxpayers in the logistics space must carefully navigate the complex Internal Use Software regulations under Treas. Reg. § 1.41-4(c)(6). If a traditional logistics company develops proprietary warehouse management software solely for internal efficiency and tracking, it faces a higher burden of proof. It must meet an additional “high threshold of innovation” test, proving the software results in a reduction of cost or improvement in speed that is substantial and economically significant. However, the software developed by autonomous vehicle manufacturers intended to be embedded in trucks sold or leased to third parties is exempt from the stricter IUS rules, falling under standard Section 41 scrutiny.
• Texas Application (SB 2206): For hardware-centric autonomous vehicle companies, the repeal of the sales tax exemption presents a short-term cost increase; the heavy sensors, computing units, and test vehicles will now be subject to state sales tax upon purchase. However, the transition to the permanent 8.722% Subchapter T franchise credit ensures that the massive software engineering payrolls associated with these autonomy projects will yield a highly lucrative, predictable state tax offset for decades. The permanent nature of the credit provides the fiscal certainty required for companies to commit to long-term algorithmic development in Fort Worth.

Freight Technology and Rail Engineering: BNSF Railway

Historical Development in Fort Worth

Railways were the original catalyst for Fort Worth’s population and economic boom following the Civil War. This deep historical legacy evolved dramatically with the 1995 mega-merger of the Burlington Northern Railroad and the Santa Fe Railway to form BNSF Railway, which established its global corporate headquarters in Fort Worth. Prior to the merger, the Santa Fe Railway demonstrated immense foresight by pioneering the modern inland logistics park concept, opening the massive Alliance Intermodal Facility in North Fort Worth in 1994. Today, operating over 32,500 miles of track across North America, BNSF is not merely a transportation company; it functions as a heavy engineering and technology firm driving the modernization, safety, and decarbonization of the continental rail freight network.

Qualified R&D Activities and Credit Eligibility

BNSF holds more patents than all other Class I railroads combined, indicating a massive, institutionalized, and highly structured R&D operation.

• Federal Application: R&D initiatives at BNSF are expansive and highly technical. Notable projects include the design and rigorous testing of a 100-percent battery-electric road locomotive (developed in partnership with Wabtec) capable of storing 2,400 kilowatt-hours of power for main-line freight hauling. Additionally, BNSF engineers have developed the complex software and hardware infrastructure for Positive Train Control (PTC) networks. At their Fort Worth Alliance facility, BNSF has invented and patented a drone-based Automated Yard Check (AYC) system that uses machine learning and 3D triangulation to instantly locate specific shipping containers, as well as AI-based Load Plan Optimization (LPO) algorithms to maximize train assembly efficiency. The development of the battery-electric locomotive involves immense technical uncertainty regarding the thermal management of massive lithium-ion arrays during dynamic braking and high-torque pulling. The thousands of engineering hours, testing permutations, and customized electrical componentry all constitute highly qualified research expenses under Section 41.
• Texas Application (SB 2206): Under the new federal conformity rules of SB 2206, BNSF’s massive software and engineering expenditures managed from its Fort Worth headquarters will seamlessly translate to state franchise tax credits. By explicitly adopting IRS line 48 parameters, the Texas Comptroller allows BNSF to utilize federal statistical sampling methodologies across its tens of thousands of engineering man-hours and thousands of active projects. This eliminates the requirement to reconstruct separate, Texas-specific evidence files or apply differing standards of innovation, drastically reducing the administrative and compliance burden for the corporate tax department while yielding a massive financial offset against the company’s state franchise tax liability.

Strategic Tax Planning and Documentation Requirements

For corporate tax departments operating within Fort Worth’s diverse industrial base, the divergence of the pre-2026 and post-2026 R&D environments requires immediate, highly analytical strategic modeling.

The impending expiration of the Texas sales tax exemption on December 31, 2025, creates a narrow, critical window for capital-intensive industries—such as aerospace manufacturing and unconventional energy extraction—to accelerate planned equipment purchases, server upgrades, and machinery acquisitions to capture the point-of-sale relief before it disappears permanently. Moving forward into 2026, the permanent 8.722% Subchapter T credit places an absolute premium on accurately capturing, tracking, and allocating engineering and software development wages that are physically occurring within the borders of Texas.

Concurrently, the heightened evidentiary standards mandated by the United States Tax Court in George v. Commissioner dictate that Fort Worth companies must definitively abandon the practice of conducting retrospective R&D studies. Companies must proactively integrate sophisticated time-tracking software and agile project management tools that link employee labor hours directly to specific technical uncertainties and experimental hypotheses in real-time. For the revised IRS Form 6765, businesses must build out robust, audit-ready qualitative narratives for every individual business component, specifically detailing what new technical information was sought, what alternatives were evaluated, and how the process of experimentation was structured to resolve the uncertainty.

Final Thoughts

Fort Worth’s economic engine is no longer driven by the cattle drives and slaughterhouses of the 19th century, but by advanced machine learning algorithms, molecular biological sciences, and next-generation aerospace engineering. The alignment of the reinstated federal immediate expensing of research and experimental expenditures under the OBBBA, combined with the permanent, elevated rates of the new Texas Subchapter T franchise tax credit, creates a highly favorable, highly subsidized regulatory environment for technological innovation. By meticulously adhering to the four-part statutory test, navigating the complex nuances of funded research and internal-use software, and leveraging the new state-level refundability provisions, Fort Worth businesses are uniquely positioned to utilize these tax mechanisms to underwrite the risk of the next generation of global technological advancement.

The information in this study is current as of the date of publication, and is provided for information purposes only. Although we do our absolute best in our attempts to avoid errors, we cannot guarantee that errors are not present in this study. Please contact a Swanson Reed member of staff, or seek independent legal advice to further understand how this information applies to your circumstances.