Texas R&D Tax Credit

The state of Texas has enacted a Research and Development Tax Credit. The law allows taxpayers to take a franchise tax credit for R&D expenditures or a sales and use tax exemption for the purchase or lease of depreciable tangible personal property used in qualified research within Texas. The franchise credit is effective for tax filings originally due on or after the effective date, January 1, 2014 and the credit is computed in a manner similar to the federal Alternative Simplified Credit. The Texas franchise R&D tax credit is 5% of the current year qualified R&D expenditures over the base amount. If a taxpayer does not have qualified R&D expenditures in one or more of the base years, the credit is reduced to 2.5%. If the taxpayer contracts with an institution of higher learning (whether public or private) within Texas for the performance of qualified research, the tax credit increases to 6.25% or 3.125% for taxpayers without a base period. The allowable credit in any single tax year cannot exceed 50% of the taxpayer’s franchise tax liability. The credit may be carried forward for up to 20 tax periods.

The Texas sales and use tax credit will not apply to qualified purchases until the effective date of January 1, 2014. The sales and use tax exemption is applicable on depreciable tangible personal property, with a useful life greater than one year, directly used in qualified research. A taxpayer may only claim the franchise R&D tax credit or the sales and use tax exemption in a given tax period. This election can be made each tax period and potentially changed retroactively, subject to penalties and interest. A combined group will be treated as a single taxable entity. Thus, if any member of the group elects the franchise tax credit or the sales and use tax exemption, the other members of the combined group will be subject to the election.

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