Texas R&D Tax Credit

Texas offers businesses a research and development tax credit to boost innovation. Such programs usually result in an increase of new products being brought to market and more jobs being created.

For this reason, the state of Texas has implemented an R&D incentive to improve the business environment for both small and bigger, more established companies. If you’re an entrepreneur looking to start or grow your business, you might want to learn more about the Texas R&D tax credit and whether your firm qualifies.

Texas Research and Development Tax Credit Explained

There are two types of this incentive: Franchise Tax Credit and Sales and Use Tax Exemption (claimed for purchasing, renting, storing, or leasing depreciable tangible personal property utilized in Texas). In other words, you can claim the Texas research tax credit to offset a part of your franchise tax. Or you can use it toward sales and utilize tax exemption on the acquisition or rental of depreciable tangible personal property used in qualifying research starting with the tax return you filed after January 1, 2014.

That said, you can’t claim both incentives for the same year. Which one you choose will largely depend on your financial position. But that decision doesn’t have to be permanent, meaning you can change it next year.

According to generally accepted accounting principles (GAAP) or IRC 167 or 168, depreciable tangible personal property can be defined as tangible property with a useful life of at least one year that loses value over time. In the case of federal income taxes, a depreciation deduction is a fair provision for the use, obsolescence, and exhaustion of specific income-producing business-related property. Similarly, a depreciable object has to be utilized directly in eligible research activities to qualify for this tax exemption.

‍Franchise Tax Credit

Although the Franchise tax credit is based on the current year’s QREs, you can only apply it to your Franchise tax report for the next fiscal year. So, if you calculate the Texas R&D credit based on your 2022 costs, you will be able to use it on the 2023 tax filing.

Furthermore, the credit is equivalent to 5% (in some cases 6.5%) of the difference between the Texas QREs for the tax period and 50% of the average Texas QREs for the past three years. To apply, file a Long Form Report Texas 05 158 (05-158-A as well as 05-158-B), R&D Activities Credits Schedule (05-178), and Credits Summary Schedule (05-160). You can submit the report online using Webfile or a tax software service.

You can only offset 50% of this incentive due for a single period. Still, you can carry forward the Texas R&D tax credit for up to twenty years.

Sales and Use Tax Exemption

You can calculate this incentive just like you would the Franchise tax credit. That is, take 5% (in some cases 6.5%) of the extra QREs over the average QREs for the past three years.

To qualify, you must register your business online with the Comptroller’s office and receive a registration number consisting of the letters RD and six digits. You need this number to fill out Form 01-931 or Qualified Research Sales and Use Tax Exemption Certificate. When buying qualified items, you must present this certificate. However, once you start using it, you will no longer qualify for the franchise credit for the rest of the tax year.

Furthermore, keep in mind that retailers don’t have to accept this certificate. So if they give you Form 00-985 (Assignment of Right to Refund), simply ask the Comptroller for a tax refund.

In order to prevent the termination of your registration, you must submit an Annual Information Report (AIR) to the Comptroller’s office no later than March 31 of each calendar year in which you made your claim. The AIR enables you to update your registration information, including the quantity of qualifying research you conducted in Texas, the number of workers performing R&D projects, and information on sales tax receipts.

How to Calculate Texas Research Tax Credit

The credit is 5% of the surplus Texas QREs in the tax year above the base amount. The base amount is 50% of the average Texas QREs for the past three years. However, if you didn’t have any QREs in at least one of the past three years, the amount is 2.5% of all QREs made in the tax year.

In case you partner with universities or colleges to carry out R&D operations, your credit will be 6.25% of the excess Texas QREs in the tax year over the base amount. You can calculate the base amount as mentioned above. But if you didn’t make any Texas QREs in the past three years, the R&D credit is 3.125% of all QREs made in the current year.

Texas Research and Development Tax Credit: Takeaway

If you conduct R&D activities in Texas, you qualify for the R&D tax credit. Use it as a tax exemption when buying or leasing depreciable tangible personal property or to offset a part of your franchise tax.

FAQs

What kind of companies can apply for an R&D tax credit in Texas?

Partnerships, LLCs, S-Corporations, C-Corporations

What is the deadline for applying for an R&D tax credit in Texas?

You must submit your application by May 15. The extended deadline is November 15.

What data do I need to calculate credit an R&D tax credit in Texas?

Claim period Texas QREs (Qualified R&D Expenses)

What information do I need to provide to file an R&D tax credit in Texas?

Texas QREs for the past three years.

Is credit carryforward an option in Texas?

Yes, up to twenty years.