r&d tax credits texas

R&D Tax Credit Texas

The R&D tax credit can help a wide variety of businesses offset and reduce their income tax liability, in addition to providing many other benefits.

Businesses engaged in qualified research activities can claim either a sales and use tax exemption or a franchise tax credit based on their qualified research expenses. However, both benefits cannot be claimed for the same period. The tax credit is typically 5% of the amount exceeding the base qualified research expenses and may be capped at 50% of the company’s franchise tax liability. If an individual opts to use their R&D credit towards sales and use tax, the calculation method is similar to that of the franchise tax credit. The credits are calculated as either 5% or 6.5% of the excess qualified research expenses (QREs) over the prior three-year average QREs. This ensures that the tax credit process remains consistent and transparent, allowing businesses to make informed decisions when choosing between the two options. By providing this flexibility, the Texas R&D tax credit aims to incentivize businesses to engage in research and development activities, thereby boosting economic growth within the state.

The Texas R&D tax credit is available to businesses that engage in qualified research activities, as defined in the Internal Revenue Code of 1986, Section 41(d) in effect on Dec. 31, 2011. These activities may include research for which expenditures can be treated as expenses under Internal Revenue Code Section 174. To be eligible for the credit, the research must aim to discover technological information and involve the intention to develop a new or improved business component. Additionally, all of the research activities must be part of an experimentation process related to improving the function, performance, reliability or quality of the component.

Businesses that want to claim the Franchise Tax Credit for their qualified research activities must file a Long Form Franchise Tax Report along with two additional forms. These forms include a Credits Summary Schedule and a Research and Development Activities Credits Schedule. By filing these forms, businesses can claim the credit on their franchise tax liability for the current year.

To claim sales tax exemption for eligible items purchased for use directly in qualified research, you must provide the retailer with a properly completed Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate, which includes your registration number. Please note that a generic sales tax exemption certificate cannot be used to claim the Texas Qualified Research Sales and Use Tax Exemption. If you use an item purchased under a valid exemption certificate in a taxable manner, you will be liable for paying sales tax and applicable penalties and interest based on the fair market rental value of the tangible personal property for the period of use. In the event that the exemption certificate was not valid when issued, the purchaser will be required to pay tax and any applicable penalty and interest on the original purchase price.

R&D Tax Credits in Texas

The Texas Research and Development (R&D) Tax Credit is a tax incentive offered to businesses that engage in qualified research activities in the state. The objective of introducing the tax credit in 2014 was to stimulate economic growth in Texas specifically in the area of research and development by providing incentives to businesses engaged in such activities. Businesses conducting qualified research have two options to claim tax benefits – they can either avail a sales and use tax exemption on tangible personal property purchased, leased, rented, stored or used in qualified research, or opt for a franchise tax credit based on their qualified research expenses. It’s important to note that these benefits cannot be claimed simultaneously for the same period. Additionally, individuals can change their election from sales tax exemption to franchise tax credit or vice versa, as the choice is not permanent.

The credit is generally 5% of the amount by which current year qualified research expenses exceed the base amount, but may be limited to 50% of the company’s franchise tax liability for the current year.

r&d tax credits texas

What Goes into the Texas R&D Tax Credit as a Qualified Research Expense?​

The Texas research and development tax credit allows for businesses to claim a percentage of their qualifying research expenses.

In order for an expense to qualify it must meet specific research criteria:

  1. Products, services, processes, or software must be new or improved in some way 
  2. Uncertainty must be eliminated as a result of the research 
  3. The research must be technological 
  4. Research must include experimentation processes of some nature

The types of expenses that are applicable to claim under the credit include the following:

Wages paid to employees who are directly involved in the performance of research and development activities within the state of Texas. This includes payments made to subcontractors involved in the performance of such activities.

Take Advantage of the
R&D Tax Credit with Source Advisors

Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.