Texas franchise tax creditsTexas businesses can now claim either a sales tax exemption or Texas franchise tax credits on qualified in-state research and development activities. The new law is effective for reports beginning Jan. 1, 2014, through Dec. 31, 2026; however, an unused credit may be carried forward for up to 20 consecutive reports. The Houston tax advisors at Doeren Mayhew provide us with these tax credit highlights to answer your questions.

What Is Qualified Research?

As defined by the IRC section 41(d), research activity must be:

  • Undertaken for discovering information that is technological in nature.
  • For an application that is intended to be used in the development of a new or improved business component of the taxpayer.
  • Elements of a process of experimentation relating to a new or improved function, performance, reliability or quality.
  • Conducted in Texas.

Does My Business Qualify for Sales Tax Exemption?

  • A business is eligible for a sales tax exemption on the purchase, lease, rental, storage or use of depreciable tangible personal property directly used in qualified research. For exemption purposes, “depreciable tangible personal property” is considered property with a useful life that exceeds one year and is subject to depreciation under generally accepted accounting principles or IRC section 167 or 168.

Does My Business Qualify for the Franchise Tax Credit?

  • The business must incur qualified research expenses.
  • A sales tax exemption must not have already been claimed, and the entity must not be part of a combined group with a member that has claimed a sales tax exemption.

How Do I Calculate Credit Amounts?

  • The franchise tax credit is calculated as 5 percent of the difference between an entity’s qualified research expenses during the period on which the tax report was based and 50 percent of the average amount of qualified research expenses over the three previous tax reporting periods.
  • Entities that contract with a public or private higher education institution to perform qualified research are eligible for a 6.25 tax credit of the difference between all qualified research expenses incurred during the report period, and 50 percent of the average amount of qualified research expenses over the three previous reporting periods
  • The total credit claimed for a report, including the amount of any carryforward credit, may not exceed 50 percent of the amount of franchise tax due for the report before any other applicable tax credits.

What if My Business Has Combined Group Expenses?

  • Any credit for qualified research expenses incurred by a member of a combined group must be claimed on the combined report for the group. For the purpose of the credit, the combined group is the taxable entity.
  • An upper-tier entity that includes the total revenue of a lower-tier entity, for purposes of computing its taxable margin, is permitted to claim the credit for qualified research expenses incurred by the lower-tier entity to the extent of the upper-tier entity’s ownership interest in the lower-tier entity.

Now is the time to evaluate your eligibility and benefit from possible R&D tax credit exemptions. For more information, or to get started with early tax planning, contact Doeren Mayhew’s Houston tax advisors.

Source: www.window.state.tx.us