Unlocking Tax Incentives in Texas for Commercial and Residential Developers

Texas is widely regarded as one of the most business-friendly states in the U.S. due to its favorable economic environment, tax policies, and regulatory framework that attracts companies from various industries. Development and construction, specifically, are large and dynamic sectors in the state, thanks in part to Texas’s relatively relaxed zoning laws and fewer building-related regulations compared to other states.

Despite this general friendliness toward the industry, commercial and residential developers also face challenges, such as rising costs for material and labor. For these reasons and more, it is crucial for development and construction leaders to understand and take advantage of tax credits and incentives available to them within the state. While not a comprehensive list, here are some of the most compelling options for commercial and residential developers.

Low-Income Housing Tax Credit (LIHTC)

Texas’s LIHTC is a state-run program that provides tax credits to developers of affordable rental housing. The program is new, having gone into effect on Jan. 1, 2024. This credit can be used by companies with ownership stakes in certain Texas affordable housing developments to offset franchise taxes and insurance premium taxes beginning on Jan. 1, 2026. LIHTCs in Texas are allocated through a competitive process administered by the Texas Department of Housing and Community Affairs (TDHCA). Developers must submit a detailed application, and projects are judged based on criteria such as affordability, project location and community impact. LIHTC projects must reserve a portion of units for low-income tenants for at least 30 years.

Properties that receive this credit will typically be monitored once every three years; the TDHCA will continue to monitor properties for compliance for up to 40 years.

Media Production Development Zone (MPDZ) Act

Construction and development companies may be incentivized to build or renovate media production facilities under the MPDZ Act. This Texas law was established in 2009 and aims to help the state compete for media production. “Media production facilities” can include sound stages, post-production buildings, and animation studios, among others.

MPDZ allows for a sales and use tax exemption. As with many other incentives and exemptions, this requires an application. A part of the application process requires the Texas Comptroller of Public Accounts to certify that the project will have a positive impact on state revenue.

Federal Rehabilitation Tax Credit Program

Another option for commercial and retail developers in Texas is a federal income tax credit available for the rehabilitation of certain historic buildings. The buildings must be commercial income-producing and be listed (or determined to be eligible for such listing) in the National Register of Historic Places. The tax credit is only for qualified rehabilitation expenditures associated with the renovation, restoration or reconstruction of a building. Enlargement of a building and new construction are generally not qualified, nor are costs such as furniture, landscaping and property acquisition.

Texas Jobs, Energy, Technology, and Innovation (JETI) Act

The JETI Act is another new program designed to attract development projects. JETI facilitates agreements among a company, a school district, and the governor’s office for a 10-year limitation on the taxable value for school district maintenance and operations property taxes. To qualify, companies must meet minimum job creation and investment requirements, which vary based on the population of the county where the agreement will occur. Companies must pay a $30,000 application fee to the local school district, and both the school district and the Texas Governor’s office must approve the project.

The JETI Act does not offer a direct tax credit to construction companies but is instead designed to promote infrastructure development, which can lead to more construction and development contracts.

45L Tax Credit

The 45L Tax Credit is a federal program offering up to $5,000 per dwelling unit to developers of certain energy-efficient apartment buildings and homes. “Energy efficiency” is measured against the EPA’s Energy Star Programs. This credit can apply to new and rehabilitated construction, and some prior-year construction can even be claimed retroactively. Additionally, any unused credit may be carried forward for up to 20 years.

R&D Tax Credit

Finally, Texas construction and development companies may qualify for a research and development (R&D) tax credit if they engage in R&D as defined by the Internal Revenue Code’s four-part test. Qualification focuses on developing or improving products or processes, and companies must demonstrate that they performed experimentation to overcome technological uncertainties. For example, an engineering firm developing a more efficient or reliable method of energy usage in industrial manufacturing could potentially qualify.

Some companies also may be eligible for the Texas R&D Credit, which is separate from the federal R&D credit and may be used to offset a portion of franchise tax or be used towards a sales and use tax exemption on the purchase or lease of property used in qualified research in Texas. It may be more favorable for Texas-based businesses to focus only on the federal R&D credit. Working with an accounting professional experienced in both federal and state credits can help you determine the most sensible path for your business.

Navigating the numerous tax incentives and credits available in Texas might feel overwhelming. To help ensure you are focusing on the most valuable credits for your specific situation, consider partnering with a business advisory service that specializes in tax incentives and has deep knowledge of both federal and state-specific opportunities.

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Optimize your tax strategy with Aprio’s business tax advisors. From securing valuable tax credits to navigating complex regulations, our holistic approach helps businesses grow. Let us help you minimize tax liabilities and create opportunities for reinvestment. Schedule a consultation today and achieve what’s next at Aprio.com. 

Aprio is the brand name under which Aprio, LLP, and Aprio Advisory Group, LLC, deliver professional services. Since 1952, clients throughout the U.S. and across more than 50 countries have trusted Aprio for guidance on how to achieve what’s next. As a premier business advisory and accounting firm, Aprio Advisory Group, LLC, delivers advisory, tax, managed and private client services to build value, drive growth, manage risk and protect wealth, and Aprio, LLP, provides audit and attest services. With proven experience and genuine care, Aprio serves individuals, entrepreneurs, and businesses, from promising startups to market leaders alike. Aprio has grown to 2,000+ team members providing solutions to clients in industries including manufacturing and distribution, non-profit and education, professional services, real estate, construction, restaurant, franchise and hospitality, government contracting and technology and blockchain. 

Carli Huband, Partner-in-Charge of Aprio’s Specialty Tax Group, helps manufacturing, technology, and engineering clients save millions of dollars every year through R&D Tax, State & Local Tax, M&A Tax, International & Federal Tax Consulting.