Industry Case Studies: Economic Development and R&D Applications in McKinney, Texas

To effectively contextualize the application of complex state and federal tax codes, it is necessary to examine the specific industrial ecosystem of the target jurisdiction. Collin County, Texas, has experienced explosive economic and demographic growth over the past four decades, with its gross domestic product increasing nearly fivefold since the beginning of the twenty-first century. Analysts project that by 2050, Collin County alone will generate ten percent of the entire economic output of the State of Texas. At the epicenter of this regional transformation is McKinney, a municipality that has successfully transitioned from an agricultural center into a highly diversified, technologically advanced manufacturing and innovation hub with a population exceeding 200,000 residents.

This transformation was neither accidental nor purely organic. The city’s economic trajectory was fundamentally altered by the establishment of the McKinney Economic Development Corporation (MEDC) in 1993, a sales-tax-funded statutory nonprofit designed to aggressively recruit high-value industries through performance-based tax grants, Chapter 380 agreements, and strategic infrastructure investments. The following case studies explore five unique industries that anchor McKinney’s economy, detailing why and how they developed in this specific location, alongside precise examples of their operations that could qualify for federal and state R&D tax credits.

Aerospace and Defense Manufacturing: Raytheon (RTX Corporation)

Historical Development in McKinney The aerospace and defense sector in McKinney is predominantly anchored by Raytheon, now operating as a major business unit of the multinational aerospace conglomerate RTX Corporation. The development of this industry in McKinney accelerated exponentially in 2013 when Raytheon made the strategic decision to relocate the headquarters of its Space and Airborne Systems (SAS) business from California to McKinney. This relocation was driven by a confluence of favorable local conditions and aggressive state intervention. The MEDC, in close collaboration with the City of McKinney and the Texas Governor’s Office, leveraged the state’s low corporate tax environment, access to a highly specialized STEM workforce, and the Texas Enterprise Fund to secure the relocation.

The aerospace footprint in McKinney continued to expand rapidly due to sustained capital investment and municipal cooperation. In 2019, Raytheon engaged local developers to construct a 200,000-square-foot expansion dedicated to electro-optical manufacturing and the production of high-energy laser systems. This was followed closely in 2021 by the announcement of a massive 400,000-square-foot Advanced Manufacturing Center designed to accommodate 700 new jobs. How this expansion was achieved is a testament to Texas municipal finance law: the City of McKinney and the MEDC executed a Chapter 380 Economic Development Program agreement, providing ad valorem tax reimbursements directly tied to Raytheon’s satisfaction of job creation milestones and the increased taxable valuation of their real and business personal property.

Qualified Research Activities and Examples Aerospace and defense manufacturing inherently involves profound technological uncertainty, making it a prime candidate for the R&D tax credit. In its McKinney facilities, Raytheon engages in the development of operational Artificial Intelligence (AI) for the Department of Defense, mentoring smaller tech firms in system design, software architecture, and the navigation of strict IT security constraints and authority-to-operate requirements. Additionally, the McKinney site is responsible for the design, development, testing, and integration of the Silent Knight radar system—a highly advanced tactical multi-mode terrain-following and terrain-avoidance radar utilized by rotary and fixed-wing special operations aircraft.

When Raytheon engineers attempt to miniaturize radar components to fit within the constrained payload of a helicopter while simultaneously shielding the electronics from extreme thermal dynamics and vibration profiles, they are engaging in a systematic process of experimentation. Formulating algorithms that allow radar systems to map terrain accurately at high speeds without succumbing to electromagnetic interference requires immense iterative testing. The wages paid to the software engineers coding the AI architectures, the aerospace engineers running computational fluid dynamic simulations, and the technicians constructing the physical radar prototypes constitute highly eligible Qualified Research Expenses (QREs) under federal and state law.

Advanced Wire and Cable Manufacturing: Encore Wire

Historical Development in McKinney Encore Wire, recently acquired to operate as a Prysmian Brand, represents a remarkable narrative of continuous industrial expansion deeply rooted in McKinney. Founded in McKinney in 1989 within a modest 68,000-square-foot warehouse, the company has methodically expanded its operational footprint into a sprawling, vertically integrated 460-acre single-site campus containing over 3.5 million square feet of manufacturing and distribution space.

Why Encore Wire developed so successfully in McKinney is largely attributable to the region’s central geographic location, which facilitates nationwide logistical superiority. How the company achieved its massive scale involves decades of relentless vertical integration designed to lower the cost of raw materials and control supply chain variables. Throughout the late 1990s, Encore Wire added a copper rod mill, a plastic mill, and secured a direct 5,000-foot railroad spur to import raw materials directly into the manufacturing complex. The company’s commitment to industrial innovation in McKinney peaked with the 2010 construction of the Encore TechLab®, a LEED® Platinum Certified R&D Center that was the first of its kind in North Texas, followed by a state-of-the-art cross-link polyethylene (XLPE) compounding facility in 2023 to pioneer advanced chemical insulations.

Qualified Research Activities and Examples While copper wire drawing is an established industry, maintaining a competitive edge requires intense metallurgical and chemical engineering. Encore Wire conducts R&D through the formulation of proprietary polymer blends and the engineering of labor-saving packaging innovations, such as the self-spinning Reel Payoff® and the lightweight PullPro® systems. Developing an advanced XLPE compound requires chemical engineers to balance flame retardancy, extreme temperature tolerance, flexibility, and dielectric strength.

During the formulation process at the McKinney campus, scientists must hypothesize chemical interactions, extrude test batches, and subject the resulting wire to rigorous thermal and electrical load testing to evaluate performance against stringent National Electrical Code (NEC) standards. If the initial polymer blend fails the flame-retardancy test or exhibits microscopic fracturing when bent, the compound must be reformulated. This iterative cycle of formulation, physical testing, failure analysis, and chemical adjustment is the quintessential definition of the scientific method required to claim the R&D tax credit.

Hobby Radio-Controlled (R/C) Vehicles and Robotics: Traxxas

Historical Development in McKinney Founded in 1986, Traxxas revolutionized the global radio-controlled (R/C) hobby industry by inventing the “Ready-to-Race” (RTR) category, systematically moving the market away from complex, unassembled kits toward fully engineered, high-performance machines ready to operate directly out of the box. The company eventually relocated its global headquarters and primary distribution center to the Craig Ranch mixed-use community in McKinney, constructing a specialized 91,207-square-foot LEED Silver certified facility on nearly 30 acres of land.

Why Traxxas chose McKinney is deeply connected to the municipal spatial layout. Developing vehicles capable of extreme performance requires vast amounts of real estate not just for warehousing, but for comprehensive outdoor testing environments. How Traxxas operates in McKinney involves retaining virtually all non-manufacturing business aspects fully in-house. From original pencil sketches and computer-aided design (CAD) to advanced solid modeling, rapid prototyping, and software interface development, the entire product life cycle is engineered within the Collin County facility.

Qualified Research Activities and Examples The products engineered by Traxxas are highly sophisticated feats of mechanical, electrical, and software engineering. The company claims numerous industry firsts, including the first waterproof electronics, the first driver-actuated forward/reverse transmissions in R/C vehicles, and the development of the Traxxas XO-1, an RTR supercar capable of exceeding 100 miles per hour.

Achieving speeds in excess of 100 mph in a scaled vehicle presents massive aerodynamic and mechanical uncertainties. Engineers in McKinney must design chassis geometries that generate sufficient downforce to prevent aerodynamic lift, while simultaneously engineering drivetrains from specialized alloys that will not shear under the extreme torque generated by high-discharge lithium-polymer batteries. Furthermore, the development of proprietary algorithms for their self-righting monster trucks and the integration of 2.4GHz transmitters with Apple iOS telemetry interfaces involve rigorous software development and hardware integration. The salaries of the mechanical designers, software coders, and the machinists fabricating the prototype chassis all fall within the scope of qualified research expenditures.

Automated Food Processing: Blount Fine Foods and Leon’s Texas Cuisine

Historical Development in McKinney Before the technological boom of the late twentieth century, McKinney’s economy was fundamentally agrarian. High yields of corn, wheat, and oats positioned Collin County among the top agricultural producers in the state, stimulating the growth of early grain processing mills established in the 1890s and 1910s. This rich agricultural history and the establishment of robust, water-intensive municipal infrastructure naturally paved the way for the modern automated food processing industry.

Leon’s Texas Cuisine, originally founded as a small barbecue operation in Dallas in 1946, evolved into a massive commercial foodservice producer. Outgrowing their Dallas capabilities, Leon’s constructed a state-of-the-art food processing facility in McKinney in 1996, effectively doubling their production capability and becoming the largest independent producer of corny dogs and stuffed jalapeños in the United States. Similarly, Blount Fine Foods, a manufacturer of prepared foods and artisan soups with roots in the New England seafood industry from the 1880s, expanded its operations into McKinney. Why these companies thrive in McKinney is due to the state’s leadership in livestock processing, the availability of large industrial tracts, and the critical central-US logistics necessary for high-volume, cold-chain distribution.

Qualified Research Activities and Examples The R&D tax credit explicitly prohibits claims based on culinary taste, cosmetic appearance, or seasonal design. However, the automated mass production of food products introduces severe mechanical and chemical engineering uncertainties. When Blount Fine Foods attempts to scale a five-gallon test kitchen artisan soup recipe into a 10,000-gallon continuous-flow automated processing line, profound technical challenges arise. Engineers must evaluate sheer rates within industrial pumps to ensure delicate ingredients are not pulverized. They must calculate complex thermal degradation curves to ensure pasteurization is achieved uniformly without burning the product, and they must engineer high-pressure processing techniques to extend shelf life without relying on chemical preservatives.

For Leon’s Texas Cuisine, engineering automated robotic extruders capable of consistently coring and stuffing jalapeño peppers without tearing the cellular structure of the organic material represents a complex mechanical engineering challenge. Designing custom machinery, testing extrusion viscosity, and evaluating thermodynamic cooling rates on the manufacturing floor constitute valid processes of experimentation eligible for federal and state tax incentives.

Medical Technology and Diagnostics: StatLab Medical Products

Historical Development in McKinney Founded in 1976, StatLab Medical Products is an industry leader in the development and manufacturing of diagnostic supplies, specifically focusing on histology, cytology, and microbiology consumables utilized in anatomic pathology laboratories globally. The company established its global headquarters in McKinney, operating a specialized, ISO13485-certified facility where they formulate and manufacture high-quality chemical prefills, diagnostic reagents, and tissue stains.

Why StatLab chose to centralize its formulation and executive operations in McKinney aligns with the MEDC’s strategic targeting of the healthcare, life sciences, and medical device manufacturing sectors. The region’s highly educated workforce and proximity to major research institutions in the broader Dallas-Fort Worth metroplex provide the necessary talent pipeline for advanced organic chemistry and diagnostic hardware development. How StatLab operates involves managing a highly resilient supply chain, developing chemical consumables in McKinney, and coordinating with peripheral sites for injection molding and slide printer manufacturing.

Qualified Research Activities and Examples

StatLab’s operations represent textbook scientific research under the statutory definitions of I.R.C. § 41. Formulating new tissue stains requires deep expertise in organic chemistry and molecular biology. If the company attempts to develop a new chemical reagent designed to react exclusively with specific cellular proteins for cancer diagnostics, they face immediate technical uncertainty regarding the chemical stability, molecular binding affinity, and shelf-life degradation of the compound.

The process of experimentation involves synthesizing various chemical iterations, testing the diagnostic accuracy under microscopes, and analyzing the results against control groups. Furthermore, developing tracking hardware like the “PiSmart” cassette and slide printer involves integrated systems engineering to ensure flawless, automated tracking of patient biopsies. The wages paid to the chemists, the costs of the precursor chemicals consumed during failed formulation attempts, and the specialized laboratory supplies used during the testing phase all represent highly defensible QREs.

The United States Federal R&D Tax Credit (I.R.C. § 41): Legal Framework and Application

The statutory foundation for the R&D tax credit is found in Internal Revenue Code (I.R.C.) § 41. This federal incentive was designed to stimulate corporate investment in experimental sciences and prevent the off-shoring of highly technical engineering jobs. To monetize this credit, businesses operating in McKinney must navigate rigorous statutory tests, intricate expense categorization rules, and evolving Internal Revenue Service (IRS) documentation mandates.

The Four-Part Statutory Test

The cornerstone of federal eligibility is the “Four-Part Test” outlined in I.R.C. § 41(d). A taxpayer’s research activities must satisfy all four criteria simultaneously to be considered “qualified research.”

• The Permitted Purpose Test: The research must be undertaken for the purpose of discovering information intended to be applied in the development of a new or improved business component of the taxpayer. Specifically, the research must relate to a new or improved function, performance, reliability, or quality. If a food processor in McKinney conducts research to change the cosmetic appearance or seasonal packaging of a product, it fails this test, as the IRS explicitly excludes research related to style, taste, cosmetic, or seasonal design factors.
• The Technological Uncertainty Test: At the onset of the project, the taxpayer must face objective uncertainty regarding the capability or method of developing the business component, or the appropriate design of the final product. This test connects closely to I.R.C. § 174, which governs the deductibility of experimental expenditures. Uncertainty exists if the information available to the taxpayer does not establish the optimal method or design.
• The Discovering Technological Information Test: The process of experimentation used to discover the information must fundamentally rely on principles of the hard sciences, such as physical sciences, biological sciences, computer science, or engineering. Economic, psychological, or social science research is strictly prohibited.
• The Process of Experimentation Test: The taxpayer must engage in a systematic and methodical process designed to evaluate one or more alternatives to achieve a result where the capability or the method of achieving that result is uncertain at the beginning of the taxpayer’s research activities. This typically involves modeling, computer simulation, or a systematic trial and error methodology.

Qualified Research Expenses (QREs)

Once an activity passes the Four-Part Test, the taxpayer must identify the associated expenses. Under I.R.C. § 41(b), QREs are rigidly defined and limited to three primary categories:

• In-House Wage Expenses: The wages paid to employees for performing, directly supervising, or directly supporting qualified research. For example, if a senior executive at Traxxas spends a quantifiable portion of their time directly supervising the testing of a new suspension chassis, a corresponding percentage of their W-2 wages may be claimed.
• In-House Supply Expenses: The amounts paid for tangible property (other than land, improvements to land, and depreciable property) that are consumed or destroyed in the conduct of qualified research. This includes the raw chemicals consumed by StatLab during diagnostic formulation testing, or the copper scrapped by Encore Wire during an experimental extrusion run.
• Contract Research Expenses: Under I.R.C. § 41(b)(3), a taxpayer may claim 65 percent of any amount paid to a third party (other than an employee) for the performance of qualified research on the taxpayer’s behalf. If the contract is with a qualified research consortium, the eligible percentage increases to 75 percent.

Strict Exclusions and Documentation Burdens

The federal statute contains numerous exclusions. The most prominent include research conducted after commercial production begins, research adapting an existing product to a particular customer’s needs, and internal-use software (unless it meets a highly rigorous “High Threshold of Innovation” test).

Furthermore, the IRS continually escalates its documentation requirements. On June 18, 2024, the IRS issued revised guidance governing refund claims for the R&D credit. To sustain an amended claim, taxpayers in McKinney must provide five specific, contemporaneous pieces of evidence: identification of all business components tied to the claim, a detailed technical narrative describing the research activities performed, a list of specific individuals involved, the precise technological purpose of the research, and a clear accounting of all qualified expenses tied to the identified projects. Relying purely on institutional memory or post-facto estimations without contemporaneous laboratory notebooks, CAD revisions, or software commit logs frequently results in total disallowance upon audit.

The Texas State R&D Tax Credit (Subchapter T): Legislative Overhaul and Legal Framework

For businesses operating in McKinney, state-level incentives provide a massive secondary layer of capital retention. However, the Texas legislative landscape underwent a paradigm shift with the passage of Senate Bill 2206 during the 89th Legislative Session in 2025, fundamentally altering how R&D is monetized within the state.

Historical Context: Subchapter M and the Sales Tax Exemption

Historically, starting in 2014, the Texas Comptroller provided taxpayers engaged in qualified research with a choice between two distinct benefits: an upfront sales and use tax exemption on the purchase, lease, or rental of depreciable tangible personal property directly used in qualified research, or a franchise tax credit based on qualified research expenses under Subchapter M. A taxpayer could not claim both simultaneously for the same period.

For capital-intensive manufacturers in McKinney, such as Encore Wire purchasing massive extrusion machinery or Blount Fine Foods purchasing automated robotics, the sales tax exemption often provided the most immediate cash-flow benefit by stripping the 6.25% state sales tax (plus local McKinney components) directly off the capital expenditure invoice. However, claiming this exemption triggered brutal audits regarding the definition of equipment “directly used” in R&D.

The 2026 Subchapter T Revolution

Effective for franchise tax reports originally due on or after January 1, 2026, the Texas Legislature repealed the elective sales and use tax exemption entirely and replaced the old Subchapter M credit with a permanent, highly enhanced Subchapter T franchise tax credit. This forces all qualifying R&D activity in Texas to be monetized exclusively through the franchise tax system.

The newly enacted Subchapter T introduces several aggressive economic development tools designed to offset the loss of the sales tax exemption:

• Massive Rate Increases: The standard franchise tax credit rate increased dramatically from 5% to 8.722% of the difference between current-year QREs and the base amount (which is 50% of the average QREs for the three preceding tax periods). If a McKinney business partners with a Texas institution of higher education for research, the rate elevates to an exceptional 10.903%. For entities with no prior QRE history establishing a base period, the base rate applies at 4.361%.
• Federal Alignment and Line 48 Conformity: Perhaps the most significant procedural improvement is the new law’s strict conformity to federal methodologies. The Texas definition of a “qualified research expense” is now explicitly tied to the exact portion of the amount reported by the taxpayer on Line 48 of the federal IRS Form 6765, apportioned for the research actually conducted physically within Texas. This rolling conformity reduces the burden of maintaining dual calculation methodologies and limits the Texas Comptroller from applying disparate interpretations of what constitutes basic R&D.
• Refundability and Scaling: Recognizing that heavy R&D expenditure often occurs during pre-revenue phases, the new Texas credit is refundable for eligible entities that owe no franchise tax for the period—such as businesses operating under the no-tax-due threshold of $2.65 million in revenue, or qualifying new veteran-owned businesses. For larger corporate entities with tax liabilities, the credit can offset up to 50% of the franchise tax due, and any unused credits can be carried forward chronologically for up to 20 years.

Critical Texas Comptroller Policy Guidance

Despite the alignment with federal law, McKinney businesses must adhere to specific Texas administrative rules. On March 24, 2025, the Texas Comptroller of Public Accounts issued two pivotal policy memoranda clarifying the computation of the new state credit.

First, Comptroller Letter No. 202503003M explicitly states that if an expense for depreciable property is allowed to be capitalized and amortized under I.R.C. § 174 as an experimental expenditure, that expense absolutely cannot be reclassified as a “supply” eligible as a QRE under the I.R.C. § 41 definition. The Comptroller correctly noted that the federal definition of supplies explicitly excludes “property of a character subject to the allowance for depreciation,” regardless of how it is treated under § 174.

Second, Comptroller Letter No. 202503004M addresses complex corporate structures. The memorandum dictates that federal “group under common control” intra-group transaction regulations do not apply when determining the Texas R&D credit. The Texas Tax Code maintains distinct definitions and rules for combined reporting groups. Consequently, multi-national conglomerates operating in McKinney must meticulously structure their intra-company contracting and cost-sharing agreements according to Texas-specific combined reporting logic, as the federal single-taxpayer aggregation rules will be rejected by state auditors.

Synthesis of Crucial Case Law Applied to McKinney Industries

The ultimate determination of R&D eligibility is forged not merely in statutory language, but in the crucible of federal and state tax courts. The following analysis synthesizes paramount judicial precedents and applies their logic directly to the operational realities of the five McKinney industries profiled.

Executive Wage Allocation and the Uncertainty Standard: Suder v. Commissioner

The Precedent: In Suder v. Commissioner (T.C. Memo 2014-201), the IRS heavily scrutinized a taxpayer’s R&D claim, challenging both the qualification of telecommunications hardware/software development projects and the reasonableness of the wages claimed by the CEO, Mr. Suder. The Tax Court delivered a resounding victory for the taxpayer. The court sustained a massive 75 percent allocation of the CEO’s wages as qualified direct research, noting that he spent the vast majority of his time steering product development from the idea generation stage all the way through alpha testing. Crucially, the court explicitly rejected the notion that a business must “reinvent the wheel” to satisfy the I.R.C. § 41 technological uncertainty requirement. The court ruled that uncertainty regarding the method or appropriate design to reach a goal is sufficient, even if the general capability to achieve the goal is theoretically known.

Application to McKinney: This case is a vital shield for firms like Raytheon and StatLab. In aerospace and medical technology, the end goal (e.g., mapping terrain, staining a cell) is known to be possible. The uncertainty lies entirely in the engineering methodology and hardware design required to execute it reliably under extreme constraints. Furthermore, Suder allows highly compensated principal engineers and executives in McKinney to be included in the wage QRE pool, provided the taxpayer can supply sufficient documentary and testimonial evidence that the executive was engaged in technical ideation and direct supervision of the experimental process, rather than mere administrative management.

The Funded Research Exclusion: Smith and System Technologies

The Precedent: I.R.C. § 41(d)(4)(H) excludes “funded research” from credit eligibility. Research is considered funded if the taxpayer does not retain substantial rights to the results, or if payment is guaranteed regardless of the success of the research. In 2025, the Tax Court ruled in Smith v. Commissioner and System Technologies, Inc. v. Commissioner, denying IRS motions for summary judgment. The IRS attempted to argue that the architecture and engineering firms in these cases did not retain substantial rights (claiming they only retained incidental “institutional knowledge”) and that payments were not contingent on success. The courts disagreed, shifting the burden to the IRS to unequivocally prove how the contracts divested the taxpayers of all rights or guaranteed payment without successful delivery.

Application to McKinney: This is the paramount legal battlefield for Raytheon and other government contractors in McKinney. Aerospace defense contracts are massive, heavily negotiated instruments. To ensure their McKinney-based research expenditures remain eligible, contractors must carefully structure their agreements. If Raytheon retains rights to use the underlying algorithms developed for the Silent Knight radar in future commercial or defense applications, or if the Department of Defense contractually bases milestone payments on the successful delivery and performance of prototype systems, the research is fundamentally at risk and therefore qualifies for the credit, circumventing the funded research exclusion.

Production Supplies vs. Experimental Supplies: Union Carbide Corporation v. Commissioner

The Precedent: For continuous-process manufacturers, the defining case is Union Carbide Corporation v. Commissioner. The chemical giant attempted to claim R&D tax credits for the full cost of millions of dollars of raw supplies used during massive manufacturing production runs, arguing that because they were testing a new process simultaneously, all supplies consumed during that run should qualify. The Second Circuit Court of Appeals ruled against Union Carbide, establishing a severe limitation: only the extra costs of supplies directly consumed by the research, or supplies ruined and rendered unsalable due to the testing, qualify. Routine production supplies that would have been consumed anyway to produce goods for sale are ineligible. Furthermore, the court emphasized that a true process of experimentation requires a systematic process of testing, analysis, and evaluation to resolve uncertainty, which Union Carbide failed to document adequately beyond simple validation testing.

Application to McKinney: This ruling directly dictates the financial modeling for Encore Wire and Blount Fine Foods. When Encore Wire runs an experimental batch of XLPE insulation over a mile of copper wire on its McKinney factory floor, the company cannot claim the immense cost of the underlying copper rod as an R&D supply if that wire passes quality control and is subsequently sold to a distributor. They may only claim the cost of the experimental polymer compound itself, or the entirety of the materials if the experiment catastrophically fails and the product must be scrapped. Similarly, Blount Fine Foods cannot claim the cost of the raw ingredients used to test a new automated cooking line if the resulting soup is commercially packaged and sold.

Pilot Models and the “Substantially All” Fraction: Little Sandy Coal Co. v. Commissioner

The Precedent: In Little Sandy Coal, a shipbuilding company claimed massive R&D credits for the construction of novel vessels, arguing that the ships themselves were physical “pilot models” used for testing. The Seventh Circuit upheld the Tax Court’s denial of the credits, centering its analysis on the “substantially all” rule found in I.R.C. § 41(d)(1)(C), which requires that 80% of a taxpayer’s research activities involve elements of a process of experimentation. The court ruled that the taxpayer failed to provide a principled way to determine what portion of employee activities constituted true experimentation versus standard fabrication. Critically, the court rejected the “novelty approach,” stating that just because a final product is novel does not mean 80% of the labor to build it was experimental. However, the appellate court did provide a massive taxpayer-friendly clarification, rebuking the lower court by ruling that costs associated with the direct support and direct supervision of research can be included in both the numerator and denominator of the 80% calculation.

Application to McKinney: This case provides the exact roadmap for hardware developers like Traxxas. When Traxxas builds a physical pilot model of a new high-speed R/C chassis in its Craig Ranch facility, they cannot simply claim all fabrication costs because the model is “new”. They must maintain contemporaneous time-tracking data, testing logs, and failure analyses to mathematically prove that 80% of the activity involved methodically testing alternatives to resolve design uncertainty. If a massive project threatens to fail the 80% test at the macro level, the taxpayer must employ the “Shrink-Back Rule,” isolating the credit claim down to specific subcomponents (e.g., just the transmission housing) that do pass the rigorous 80% experimental threshold. The appellate court warned that pursuing an “all or nothing” strategy at the macro level is a critical error.

State Definitions of Actual Manufacturing: Southwest Royalties, Inc. v. Hegar

The Precedent: While the federal courts debate the nuances of experimentation, the Texas Supreme Court has established brutally strict standards for how the state defines industrial processes. In Southwest Royalties, Inc. v. Hegar, an oil and gas exploration company sought a state tax exemption for heavy equipment used to extract and separate hydrocarbons, arguing the equipment was used in processing. The Texas Supreme Court unanimously ruled in favor of the Comptroller, concluding that the equipment did not induce a physical or chemical change through application, but rather facilitated changes caused by natural underground pressure dynamics. Therefore, the equipment was not used in “actual manufacturing, processing, or fabricating”.

Application to McKinney: This case highlights the historical combativeness of Texas State Office of Administrative Hearings (SOAH) audits. For companies like StatLab mixing volatile chemicals, or Encore Wire extruding plastics, proving that machinery was “directly used” in R&D under the old state sales tax exemption required overcoming the Comptroller’s incredibly narrow definition of processing. Moving into 2026, the legislative shift to Subchapter T is a massive relief for McKinney taxpayers. Because Subchapter T now explicitly ties the Texas definition of a Qualified Research Expense to Line 48 of the federal IRS Form 6765, the state is effectively forced to defer to federal engineering standards, bypassing the restrictive Texas Supreme Court interpretations of “actual processing” utilized in sales tax disputes.

Strategic Recommendations and Final Thoughts

The economic environment of McKinney, Texas, presents an extraordinary opportunity for technologically driven enterprises. Supported by municipal ambition, strategic location, and a deep talent pool, industries ranging from aerospace and medical diagnostics to food processing and robotics have established highly sophisticated operations within Collin County. The United States federal R&D tax credit (I.R.C. § 41) remains the premier financial mechanism to underwrite the immense technical risk assumed by these companies, offering substantial capital recapture for those willing to engage in systematic, scientific experimentation.

Concurrently, the state of Texas has modernized its incentive structure. The 2026 implementation of the Subchapter T franchise tax credit permanently intertwines state tax relief with federal calculation methodologies. While the loss of the upfront sales tax exemption demands a recalibration of capital expenditure strategies, the enhanced 8.722% credit rate, twenty-year carryforwards, and newly established refundability for pre-liability entities provide a superior, stabilized framework for long-term corporate planning.

However, the legal precedents established in Little Sandy Coal, Union Carbide, and Suder issue a clear warning: the judiciary will not reward intuition or post-facto estimation. Securing these vital tax assets requires McKinney taxpayers to operationalize their tax strategies directly onto the manufacturing floor. Companies must implement robust, contemporaneous documentation systems—tracking engineering hours, segregating experimental supply costs from routine production materials, logging hardware failures, and meticulously mapping scientific uncertainties. By elevating their recordkeeping to match the sophistication of their engineering, industries in McKinney can fully leverage state and federal tax codes to ensure sustained technological dominance.

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.