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Texas Taxes

Franchise Tax Credit for Qualified Research and Development Activities
Effective for reports due on or after Jan. 1, 2014

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Overview

A new law allows taxable entities engaged in qualified research, as defined by Internal Revenue Code, Section 41, to claim either 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.

Taxable entities that contract with public or private institutions of higher education for the performance of qualified research are allowed an increased amount of franchise tax credit. The qualified research expenses must be incurred in Texas, under the contract and during the period on which the report is based.

The franchise tax credit is effective for reports due on or after Jan. 1, 2014. The credit expires on Dec. 31, 2026; however, any unused credit established before the expiration may be carried forward for 20 consecutive reports.

A taxable entity cannot claim both the franchise tax credit and sales tax exemption for the same period. The election to claim the franchise tax credit or sales tax exemption is not permanent and can be changed.

More About the Franchise Tax Credit for Qualified Research and Development Activities

What is qualified research?

Qualified research is defined by reference to Internal Revenue Code Section 41(d) and includes research for which expenditures can be treated as expenses under Internal Revenue Code Section 174, with the additional requirement that the research must be conducted in Texas.

The research must be undertaken for discovering information that is technological in nature, and its application must be intended for use in developing a new or improved business component of the entity undertaking the research. Substantially all of the research activities must be elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.

What are qualified research expenses?

Qualified research expenses are the sum of in-house research expenses and contract research expenses.

In-house research expenses are defined as any wages paid or incurred to an employee for qualified services performed by the employee, any amount paid or incurred for supplies used in the conduct of qualified research and any amount paid or incurred to another person for the right to use computers in the conduct of qualified research.

Contract expenses are generally defined as 65 percent of any expenses paid or incurred to any person, other than an employee of the taxpayer, for the performance, on behalf of the taxpayer, of qualified research or services which, if performed by employees of the taxpayer, would constitute qualified services.

What constitutes qualified services?

Qualified services are services performed by a person engaged in qualified research, directly supervising qualified research and/or directly supporting qualified research.

What is the amount of credit?

The amount of credit for any report equals five percent of the difference between qualified research expenses in Texas (QRET) and 50 percent of the average amount of QRET incurred during the three tax periods preceding the period on which the report is based.

If the taxable entity contracts with one or more public or private institutions of higher education for the performance of qualified research and the taxable entity has QRET under the contract during the period on which the report is based, the credit for the report equals 6.25 percent of the difference between all QRET incurred during the period on which the report is based and 50 percent of the average amount of all QRET incurred during the three tax periods preceding the period on which the report is based.

If the taxable entity has no QRET in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 2.5 percent of the QRET incurred during that period.

If the taxable entity contracts with one or more public or private 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, but has no QRET in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 3.125 percent of all QRET incurred during that period.

How is the franchise tax credit established and claimed?

A taxable entity establishes and claims the Research and Development Activities Credit by filing all three of the following forms:

What is a public or private institution of higher education?

An institution of higher education and a private or independent institution of higher education are both defined in Education Code Section 61.003.

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