Texas R&D Tax Credit Summary

 

Beginning with tax returns filed after January 1st, 2014 (for tax years ended in 2013), Taxpayers in Texas can claim the R&D Tax Credit to offset  (1) a portion of their franchise tax or (2) use it towards a sales and use tax exemption on the purchase or lease of depreciable tangible personal property used in qualified research in Texas. Qualified Research Expenses (QREs) have the same meaning as in IRC § 41, except that such expenses must be for research conducted within Texas.

However, effective 01/01/2014, the Strategic Investment Area Credit for R&D is repealed for reports due on or after 01/01/2008. Although unused credit can be carried forward until earlier of date credit would have expired, or 12/31/2027.

R&D Credit Summary (applicable to reports originally due on and after January 1, 2014)

The R&D tax credit equals:

  • 5% of the excess amount of Texas Qualified Research Expenses (QREs) in the current period over the base amount (50% of the average of the three preceding taxable years)

    • If the taxpayer contracts with a public or private institution of higher education for performance of qualified research in the state of Texas, the tax credit increases to 6.25% of the difference between the current period QREs and the base amount.

    • If a taxpayer has no QREs in one or more of its base years, the credit will be equal to 2.5% (3.125% if contracted with an institution of higher education) of the current period QREs. 

  • The total credit claimed for a report (including any carry forward credit) cannot exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits

R&D Tax Credit - Use against Sales & Use Tax

Overview

  • In 2014, a Texas law went into effect to encourage economic development in Texas related to research and development.

    • The new rule 34 TAC § 3.599 implements House Bill (HB) 800, 83rd Legislature 2013, which added Tax Code, Chapter 171, Subchapter M to create a mechanism for taxpayers to either claim a credit against their franchise tax report or a sales tax exemption for expenses incurred in conducting certain research and development activities. The new rule covers many important compliance topics including, but not limited to, the credit effective date and eligibility requirements; general method for calculating the amount of the credit; maximum allowable credit per report; credit carryforwards; and credit application, schedule, and forms. 

  • A person engaged in qualified research can claim either:

    • a sales and use tax exemption on the purchase, lease, rental, storage or use of depreciable tangible personal property directly used in qualified research, or

    • a franchise tax credit based on qualified research expenses.

  • A person cannot claim both the sales tax exemption and the franchise tax credit for the same period. The election to claim the sales tax exemption or take the franchise tax credit is not permanent and can be changed.

Who can claim the sales tax exemption?

  • The sale, storage or use of depreciable tangible personal property directly used in qualified research is exempt from Texas sales and use tax if the property is sold, leased or rented to, or stored by, a person who:

    • is engaged in qualified research;

    • will not, as a taxable entity or as a member of a combined group, claim a franchise tax research credit on a franchise tax report for the period during which the depreciable tangible personal property used in qualified research would first be subject to Texas sales or use tax; and

    • registers with the Comptroller's office.

How do I register for the sales tax exemption for qualified research?

How do I claim the sales tax exemption?

  • Give a properly completed Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate (PDF), to the retailer when claiming an exemption on eligible items purchased for use directly in qualified research. The generic exemption certificate is not acceptable. You must include the registration number on the exemption certificate.

    • If you purchase an item under a valid qualified research exemption certificate and use that item in a taxable manner, you are liable for payment of sales tax and applicable penalty and interest based on the fair market rental value of the tangible personal property for the period of time used. If the exemption certificate was invalid at the time of its issuance, you will owe tax and applicable penalty and interest on the original purchase price.

How do I file an annual information report?

  • Registrants claiming the sales tax exemption must file an Annual Information Report (AIR) with the Comptroller's office on or before March 31 each calendar year in which they claimed the sales tax exemption to avoid cancellation of the registration.

    • The AIR allows registrants to renew their registration number and report required information about the amount of qualified research they performed in Texas; the number of employees engaged in research and development in Texas; and data regarding sales tax revenue.

Eligible Entities: C-Corporation, S-Corporations, LLCs, Partnerships

Deadline for Tax Filing: Due with Texas Tax Return

  • A taxable entity must apply for a credit on or with the tax report for the period for which the credit is claimed.

  • Apply against Sales & Use Tax 

    • File Annual Information Report (AIR)  by 3/31 (see above)​

Data Required to Compute Credit:

  • Claim Period Texas Qualified R&D Expenses (QREs)

  • Texas QREs for Prior 4 Years

Credit Carryforward: 20 Years

  • An unused credit can be carried forward for up to 20 consecutive tax periods.

Refundable/Transferable Tax Credit: No

Important Links and Forms:

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