Posted by on 10.06.21

Companies engaged in research and development (R&D) activities in the state of Texas can receive reductions in either applicable sales tax or franchise tax with certain qualifications. The R&D tax credit is administered through the Comptroller of Public Accounts.

The Texas R&D credit represents an outstanding opportunity for taxpayers to receive credit for qualified research expenses they are conducting. This incentive is in addition to the federal R&D tax program, which Congress made permanent in 2015.

See related blog: PATH Widens for R&D Tax Credit Opportunities

Background

In 2014, a Texas law went into effect to encourage economic development in Texas related to R&D. Beginning with tax returns filed after January 1, 2014 (for tax years ended in 2013), taxpayers 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 filing entity 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.

Highlights

• Qualified research expenses (QREs) have the same meaning as in the federal R&D tax credits under IRC § 41, except that such expenses must be for research conducted within the state of Texas
• The amount of the credit is 5% of the difference between:
  • the qualified research expenses incurred in Texas during the period on which the report is based; and
  • 50% of the average amount of qualified research expenses incurred in Texas during the three tax periods immediately preceding the period on which the report is based.
• Unused credits can be carried forward for up to 20 years
• The franchise tax credit in any one period, including carryforward amounts, cannot exceed 50% of the franchise tax due for the period
• For filing entities that do not have qualified expenditures in prior years, they are still eligible to claim a 2.5% credit against current year QRE’s
• The R&D credit is available on returns originally due on or after January 1, 2014, and will expire on December 31, 2026

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, stored by or used 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.

To claim the sales tax exemption, the taxpayer must submit the Texas Qualified Research Sales and Use Exemption Certificate to the retailer when claiming an exemption on eligible items purchased for use directly in qualified research.

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for innovative businesses in Texas. Given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.