Texas Franchise Tax Credit For Qualified Research
In 2014, a Texas law went into effect to encourage economic development in Texas related to research and development.
The Texas regulations state that a person engaged in qualified research can claim either (but not both):
- a franchise tax credit based on qualified research expenses, or
- a sales and use tax exemption on the purchase, lease, rental, storage or use of depreciable tangible personal property directly used in qualified research.
Franchise Tax Credit
The R&D tax credit is available on returns originally due on or after January 1, 2014, and will expire on December 31, 2026. The definition of research in Texas adopts the federal regulations in Internal Revenue Code of 1986, Section 41(d) and includes research for which expenditures can be treated as expenses under Internal Revenue Code Section 174.
The credit amount is 5% of the excess amount of qualified research expenses in the current period over the base amount (50% of the average of expenses incurred in Texas during the previous three previous tax periods).
The allowable Franchise Tax Credit in any one period, including carryforward amounts, cannot exceed 50% of the franchise tax due for the period, and similar to federal R&D tax credits, the unused Texas credits can be carried forward for up-to 20 years.
Sales and Use Tax Exemption
The sales and use tax exemption will be effective for activities beginning after January 1st, 2014. If a company chooses to forgo the research credit, it can elect the sales tax exemption for qualified research for the sale, storage or use of depreciable tangible personal property ‘directly’ used in qualified research.
In order to claim the exemption, a company must register online with the Comptroller's office before claiming the exemption on qualifying purchases or by filing Form AP-234, Texas Registration for Qualified Research and Development Sales Tax Exemption. The Comptroller's office will issue a Texas Qualified Research Registration Number to be used when completing Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate. Registration is required annually by March 31st and the Comptroller may cancel the sales tax exemption.