How Texas Businesses Account for Tax Credits

Texas business owners frequently ask “How should we account for tax credits issued by state agencies?” It is not as simple as merely offsetting the credit against the tax liability. How this amount appears in financial statements, when it should be recognized, whether federal income tax applies, and how it affects state tax filings-each step involves proper application of accounting standards and carries risks related to tax compliance. While Texas does not impose a corporate income tax, it administers numerous state-level tax incentive programs, including the Texas Enterprise Fund (TEF), the Texas Manufacturing Assistance Program (TMAP), and industry-specific credits targeting priority sectors such as renewable energy, semiconductors, and data centers. In March 2025, the Texas Office of Economic Development and Tourism (OEDT) released the Accounting Guidance for Tax Credits (2025 Revised Edition), which-for the first time-explicitly requires businesses to classify tax credits into two categories “transferable” and “non-transferable,” each subject to distinct accounting treatments.

I. Determine the Nature of the Credit First, Then Select the Appropriate Accounting Account

1. If the credit may be used only to offset the business’s Texas sales tax, use tax, or certain franchise taxes-and cannot be sold, transferred, or redeemed for cash-it qualifies as a “non-transferable credit.” Such credits shall be accounted for under ASC 740-10 as “tax reductions.” They are not recognized as revenue. Instead, in the period when the credit is actually applied, the corresponding tax liability is directly reduced, and the source of the credit and its remaining available balance must be disclosed in the financial statement notes.

2. If the credit certificate has been approved by the Texas Comptroller of Public Accounts for trading in a secondary market (e.g., certain clean-energy project credits), it constitutes a “separately identifiable asset.” It must be initially measured at fair value under ASC 820; subsequent changes in fair value shall be recognized either in other comprehensive income or in net income, depending on management’s stated intent for holding the asset.

3. Upon receipt of the official credit approval letter, the enterprise must concurrently obtain the OEDT-issued Tax Credit Eligibility Confirmation ID (TEFID). This unique identification code serves as the prerequisite for accounting recognition; no entry may be recorded prior to its issuance.

II. Timing Is Critical Neither Premature Nor Unduly Delayed Recognition

1. The point in time when the right to the credit arises must be objectively tied to verifiable events-such as actual project commencement, equipment acceptance, or achievement of employment targets-not merely the date the agreement was signed. For example, an Austin-based semiconductor manufacturer that completed commissioning of its first production line and hired at least 200 local employees in June 2025 would satisfy the credit’s triggering conditions only as of that date.

2. Actual tax offset occurs upon filing the quarterly Texas sales tax return with the Texas Comptroller’s Office and selecting the applicable credit code. Accounting treatment may be finalized only on the date the system generates the official offset confirmation.

3. If the credit expires three years from issuance but remains unused in Year 2, the enterprise must disclose the reason for non-utilization and the remaining validity period in the annual report’s notes. The recognition period may not be unilaterally extended.

III. Documentation Must Be Robust-Audit-Ready from Day One

1. Original official tax credit approval letter issued by the OEDT (including unique reference number and effective date);

2. Evidence substantiating project implementation equipment procurement invoices, executed employment contracts and corresponding social security contribution records, and third-party engineering acceptance reports;

3. Confirmation of successful offset issued by the Texas Comptroller’s Office (Form 01-359 or a screenshot from the electronic filing system);

4. Internal approval documentation a jointly signed Resolution Memo on Tax Credit Utilization, endorsed by the Chief Financial Officer, General Counsel, and senior executives.

Note Beginning in 2025, the Texas State Auditor’s Office has included tax credit accounting practices within its routine audit sampling scope. During FY2025, seven enterprises receiving TEF funding were required to make retrospective accounting adjustments-and pay additional federal income tax plus associated interest-after incorrectly recording non-transferable credits as “other income.” Such adjustments impact not only the income statement but may also trigger covenant breaches under debt agreements tied to EBITDA performance metrics.

Additionally, although Texas imposes no corporate income tax, federal tax treatment remains governed by IRS Revenue Ruling 2011-1, which requires careful characterization of the credit’s nature. If the credit effectively functions as a subsidy for capital expenditures (e.g., reimbursement for equipment purchases), U.S. federal tax law may require the benefit to be recognized as taxable income on a pro-rata basis over the useful life of the underlying asset-a nuance often overlooked by taxpayers.

The above outlines the core principles governing tax credit recognition for Texas-based enterprises. We hope this guidance proves helpful. We recommend initiating a coordinated review involving Finance, Tax, and Legal departments immediately upon formal approval of each tax credit application-to jointly finalize the selected accounting policy, disclosure approach, and completeness of the supporting documentation chain.