Texas R&D Credit

For Texas taxpayers looking to reduce franchise tax liability or receive a sales tax exemption.

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Documentation is often enough to suffice as proof of qualified expenses. Financial records, payroll records, and invoices are some of the documentation you need to support your qualified expenses.

A person in Texas who performs qualified research can claim R&D tax credits, also known as the Research and Development credit. This enables Texas taxpayers to potentially reduce their franchise tax or sales tax. Taxpayers might qualify for the credit if they paid for (or incurred) qualified research expenses. The Texas research credit defines qualified research under the Internal Revenue Code of 1986, Section 41(d), as well as research expenditures listed under IRC Section 174.

While the Texas research credit is similar to the federal R&D credit, there are a few key features to highlight:

  • A person can claim either the Franchise Tax Credit or the Sales Tax Exemption (only one can be elected)
  • The Texas research credit is nonrefundable
  • Only Texas-based expenses can be included as Qualified Research Expenses
  • The research credit amount is 5% on incremental expenses over the base amount (with the base amount being 50% of the average of the past 3 years)
  • There is a carryforward period of up to 20 years

You can read more about the Texas research credit here.

What is the Franchise Tax Credit?

The Franchise Tax Credit is based on Qualified Research Expenses. This credit can be claimed by any person who performs qualified research activities, but it cannot be greater than 50% of the franchise tax due for that period.

What is the Sales Tax Exemption?

As of January 1st, 2014, under the Texas research credit, the Sales Tax Exemption applies to the purchase, lease, rental, storage, or use of depreciable tangible personal property directly used in qualified research, as long as the property was sold, leased, stored by, or rented to an individual who meets each of the following requirements:

The person is engaged in qualified research
Has registered with the Comptroller’s office
Will not claim a franchise tax research credit for the period during which the depreciable tangible personal property used in qualified research is subject to sales tax, under Texas Tax Code Section 151.3182
Tangible personal property is defined as having a useful life of more than 1 year. It also must be subject to depreciation under Generally Accepted Accounting Principles or IRC Sections 167 or 168, and the property must be used in qualified research.

Tangible personal property also must be subject to depreciation under Generally Accepted Accounting Principles or IRC Sections 167 or 168, and the property must be used in qualified research.

What are Qualified Research Activities in Texas?

Qualified Research Activities can include the below. These activities must take place within Texas.

Creating improved products, processes, formulas, software, and techniques
Automating or improving internal manufacturing processes
Designing tools, jigs, fixtures, and molds
Integrating new equipment
Development of data centers, big data, and data mining tools
Integration of APIs and other technologies
Development of financial or pricing models
Manufacturing new or improved products
Developing prototypes, first articles, models
Evaluation of alternative materials
Development of firmware
Network hardware and software development and optimization
Developing simulators
Development of risk management systems
Hiring outside consultants to perform any of the listed activities

Find out if you qualify for the Texas research credit.

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How the R&D Tax Credit Works in Texas

What Information is Needed?

Properly claiming the R&D tax credit can be difficult without the right expertise - That’s where GOAT.tax comes in. Our R&D tax credit software identifies any qualified research expenses your company paid and qualified research activities to ensure you receive the largest refund possible.

For the Franchise Tax Credit, taxpayers might need to show documentation in the form of gross receipts, employee compensation, contracted services, materials costs, and vendor invoices.

For the Sales Exemption, taxpayers will need to provide a description of items when they complete the Qualified Research Sales and Use Tax Exemption Certificate.

Meeting the Four-Part Test

All taxpayers in Texas that perform these qualified research activities must satisfy the following criteria of the IRS Four-Part Test as outlined in IRC §41(d):

1. Business Component Test
The activity must be related to the performance, quality, reliability, or new or improved function of a business component of the taxpaying company. A business component is defined to be “any product, process, software, technique, formula or invention used by the taxpaying company in trade or business.”
2. Technological Uncertainty Test
The activity must involve the elimination of uncertainty. An activity entails uncertainty if the taxpayer did not know one or more of the following:

  • Whether the desired results could be achieved.
  • The specific means of achieving the desired result.
  • The appropriate design of the business component is being developed.
    3. Process-of-Experimentation Test
    “Substantially all” of the activity must involve a “process of experimentation” involving more than one possible approach toward achieving the result, where the capability or method of achieving the result is uncertain at the outset of the activity.
    4. Technological‐in‐Nature Test
    Activities that are undertaken to discover information must be technological in nature. For example, experiments used to eliminate uncertainty must rely on principles of physical or biological sciences, engineering, or computer science.

    Credit Carryforward

    The Texas research credit has a carryforward of 20 years.

    How To Claim Your Texas R&D Tax Credit

    There are two separate processes for claiming the Texas research credit, which are dependent on whether you file the Franchise Tax Credit or the Sales Tax Exemption.

    Franchise Tax Credit: File a Long Form Franchise Tax Report (05-158-A and 05-158-B), Credits Summary Schedule (05-160), and Research and Development Activities Credits Schedule (05-178).

    Sales Tax Exemption: Complete Texas Qualified Research Sales and Use Tax Exemption Certificate Form 01-931. The registration number must be included on the exemption certificate. Additionally, anyone claiming the Sales Tax Exemption must also file an Annual Information Report (AIR). This form must be submitted by March 31st during the same year the exemption is being claimed.

    Texas R&D Tax Credit From The Experts: GOAT.tax

    GOAT.tax was created for the purpose of educating businesses on the R&D tax credit and assisting companies and taxpayers that qualify for the credit to claim it. Through the 305+ years of collective automating R&D tax credit experience across our nationwide team of over 50 R&D tax professionals, we have been able to take all the guesswork out of this complex tax credit incentive. The experts at GOAT.tax can help your business with automating R&D credit through our innovative platform.
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    Hire US-based engineers, developers, or scientists.
    Designs and develops product prototypes and/or software.
    Performs experimentation and validation on products, manufacturing processes, and/or software.
    None of the above.

    This calculator has been developed utilizing data from a variety of studies conducted in the industries listed. This is only an approximation based on a variety of assumptions and should be treated as such.

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    Based on your responses, we believe that you are not currently eligible for the R&D tax credit.

    Please check back with us if you perform any product or software development-related work in the future.

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