Texas’ HB 800 R&D Tax Incentives Bill reinstated the state’s popular research and development tax credit (R&D Tax Credit), which had previously been eliminated in 2006. The new R&D incentive, effective for tax reports due on or after January 1st, 2014, offers taxpayers the choice of either a franchise tax credit for 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 R&D.
Franchise Tax Credit – R&D Tax Credit
Taxable entities engaged in qualified research activities under the criteria of Internal Revenue Code Section 41, the basis for the federal R&D credit, may claim a credit equal to 5% of qualified expenses such as wages, supplies and contractor costs over a base amount
Taxable entities may claim the franchise tax credit as long as they are engaged in qualified research activities in Texas. The criteria for qualification follow the guidelines of Internal Revenue Code Section 41, the basis for the federal R&D credit. The franchise tax credit is equal to 5% of qualified research expenses in Texas (QRET) such as wages, supplies and contractor costs over a base amount. The base amount, in turn, is calculated using the QRET incurred by that entity over the previous three tax periods.
If the entity incurs QRET while contracted with a public or private institute of higher education, the credit percentage increases to 6.25%. Regardless of whether or not the research is undertaken with an institute of higher education, the credit may also be taken at a reduced percentage even if the entity did not have QRET in all three years preceding the period the credit is claimed.
Sales and Use Tax Exemption for R&D
In order to take advantage of the sales and use tax exemption, a taxable entity must first register with the state Comptroller’s office before claiming the exemption. Transactions for the sale, lease, rental, or storage of tangible personal property are then exempt as long as the following criteria are met:
- The entity who purchases, rents, leases, or stores the items is conducting qualified research in Texas under the guidelines of Internal Revenue Code Section 41;
- The property is directly used in qualified research activities in Texas;
- The property has a useful life of more than one year and is subject to depreciation under either generally accepted accounting principles or IRC Sec. 167 or 168.
Is your Company Eligible to Claim R&D Credits and Incentives in Texas?
Because both the franchise tax credit and the sales and use tax exemption cannot be taken in a single tax period, it is important to have expert guidance in determining which incentive is more beneficial for you every year. Warner Robinson’s experienced team has been assisting Texas clients in claiming the federal R&D tax credit since the 1990s, and we have been working with the new Texas R&D incentives since they were enacted.
Contact us today to find out how we can help your business identify, substantiate and sustain its maximum benefit.