Federal R&D Tax Credit

The Research & Experimentation Tax Credit, most frequently known as the R&D Tax Credit, is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development (R&D) costs in the United States. The credits are a tax incentive for performing qualified research in the United States, resulting in a credit to a tax return.

For the first three years of R&D claims, 6% of the total qualified research expenses (QRE) form the gross credit. In the 4th year of claims and beyond, a base amount is calculated, and an adjusted expense line is multiplied times 14%.

The credit was established as part of the Economic Recovery Tax Act of 1981. It was intended to act as an economic stimulus that would encourage investment within the United States. All industries and most types of businesses can qualify for the R&D tax credit if they can satisfy the 4-Part Test.

IRS’ 4-Part Test

  1. Is the work technological in nature?
  2. Is there a permitted purpose?
  3. Is there elimination of uncertainty?
  4. Is there a process of experimentation?

Texas R&D Tax Credit

On June 14, 2013, House Bill 800 was signed reinstating Texas R&D tax credits through 2026. In order to achieve a benefit from R&D in Texas, the taxpayer must elect the tax to which the R&D credit will be applied: Either the Texas franchise tax (up to a 50% cap) or exemption from the sales and use tax.

The Texas R&D credit is derived with the same information used to calculate the Federal credit.  Therefore, the taxpayer does not need to pull new information that wasn’t already used to compile the Federal return.  The effort required to claim the Texas credit is nothing more than the time it takes to re-enter existing information on a Texas form.

Texas Franchise Tax

The Texas Franchise Tax is a “privilege tax” imposed on corporations chartered in Texas or Non-Texas corporations doing business in Texas. Corporations pay the greater of the tax on net taxable capital or net taxable earned surplus.

The Franchise tax is applicable for tax returns prepared after January 1, 2014. For taxpayers with fiscal year ends in the midst of a year, qualified research expenses (QRE) incurred in part of 2012 may be claimed. For example, if a taxpayer has a fiscal year end date of June 30, QRE incurred from July 1, 2012 to June 30, 2013 may be claimed.

The rates used to calculate the credit hinge on whether or not the taxpayer worked through a university and how many years the credit is being claimed:

  • Less than 3 years of QRE and did NOT work through a university = 2.5%
  • Less than 3 years of QRE and did work through a university = 3.125%
  • 3 years of QRE and did NOT work through a university = 5%
  • 3 years of QRE and did work through a university = 6.25%

The credit is applied against the Franchise tax due. The allowable Franchise Tax Credit in any one period, including carry forward amounts, cannot exceed 50% of the franchise tax liability for that period. Any excess beyond the previous 50% threshold can be carried forward for 20 years. The credit cannot be transferred unless all assets associated with it are transferred in the same transaction.

Texas Sales and Use Tax

The Texas Sales and Use Tax is a transaction tax imposed on sellers and/or buyers. Normally it is calculated as a percentage of a sales price and collected by the seller from the buyer and transmitted to the State. Rates are a local option with 8.25% of the sales price being common, 6.25% going to the State and up to 2% to the local government.

The tax exempts the taxpayer from the sales and use tax on tangible, personal property used in qualified research and development purchased or leased after January 1, 2014. It does not include activity in 2012 and 2013, as does the Franchise Tax credit election.

Take our Eligibility Wizard to find out if you qualify for the credit.