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Frequently Asked Questions

Franchise Tax Credit for Qualified Research and Development Activities


When calculating the credit, are only the expenses incurred under contracts with institutions of higher education subject to the higher rate?

No. If a taxable entity contracts with one or more institutions of higher education for the performance of qualified research and the taxable entity has QRET incurred under the contract during the period on which the report is based, all of the taxable entity’s qualified research expenses are subject to the higher rate.

Can a combined group claim a credit for qualified research expenses incurred by a member?

Yes. The reporting entity for the combined group must claim the qualified research expenses incurred by a member of the combined group on the combined report required under Tax Code Section 171.1014. However, the combined group is not eligible to establish a credit for qualified research expenses incurred for the period covered by the report if a member of its combined group has an active Texas Qualified Research Registration Number during the same period.

Can an upper tier entity in a tiered partnership arrangement establish and claim a Research and Development Activities Credit for qualified research expenses incurred in Texas by a lower tier entity?

Only an upper tier entity that includes the total revenue of a lower tier entity for computing its taxable margin can claim a credit for qualified research expense incurred by the lower tier entity, but only to the extent of the upper tier entity’s ownership interest in the lower tier entity.

Are there any limitations to the amount of credit that can be claimed against the amount of tax due for the period covered by the report?

The total credit claimed, including the amount of any carryforward credit, cannot exceed 50 percent of the amount of franchise tax due before any other applicable tax credits.

Can unused Research and Development Activities Credit be carried forward?

Yes. Any unused credit can be carried forward for 20 consecutive reports.

When does the Research and Development Activities Credit expire?

The Research and Development Activities Credit expires December 31, 2026. The credits allowed under this section cannot be established on a report due after the expiration date. A taxable entity can carry forward unused credit established before the expiration date for 20 consecutive reports.

Why would a Research and Development Activities Credit be denied?

A taxable entity is not eligible to claim a Research and Development Activities Credit on a franchise tax report due before Jan. 1, 2014.

The credit will also be denied if the taxable entity or a member of its combined group has an active Texas Qualified Research Registration Number for the same period upon which the franchise tax report is based. The Qualified Research Registration Number is required when claiming a sales tax exemption on qualifying purchases. A taxable entity cannot claim both the franchise tax credit and sales tax exemption for the same period.

Can a taxable entity take both the sales and use tax exemption and the franchise tax credit for the same period?

No. A taxable entity or a member of the combined group is not eligible to establish a credit for qualified research expenses incurred for the period covered by the report if the entity or a member of its combined group claims the sales and use tax exemption for qualified research for the same period. However, a taxable entity or member of the combined group can claim a carryforward from prior years for the same period it claims the sales and use tax exemption for qualified research.

How can a taxable entity that took the sales and use tax exemption take the franchise tax credit instead?

A taxable entity that registered for the Sales Tax Exemption for Qualified Research can subsequently choose to claim a franchise tax Research and Development Activities Credit for that period. The registrant must first cancel its Texas Qualified Research Registration Number. Then, before claiming a franchise tax credit, the registrant is responsible for remitting Texas sales and/or use tax, penalty and interest from the date of purchase on any items purchased tax-free during the period covered by the franchise tax report. A taxable entity with a Texas sales and use tax permit must amend any previously filed sales and use tax returns to include their purchases. A taxable entity without a Texas sales and use tax permit must file a use tax return (Form 01-156)

How can a taxable entity that took the franchise tax credit take the sales and use tax exemption instead?

A taxable entity that previously claimed a franchise tax credit but wishes to claim the sales tax exemption for the period in question instead can do so by amending the franchise tax report filed for that period and paying any additional tax, penalty and interest due before registering for the Sales Tax Exemption for Qualified Research.

After receiving a Texas Qualified Research Registration Number, the registrant can request a refund of the tax directly from the retailer or from the Comptroller’s office with an Assignment of Right to Refund provided by the retailer.

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