Texas R&D Tax Credit Glossary
This comprehensive glossary defines key terms, forms, and statutes relevant to the Texas Research and Development Tax Credit. It covers critical concepts such as Qualified Research Expenses (QREs), Franchise Tax liability reductions, and specific exclusions under Chapter 171 of the Texas Tax Code and IRC Section 41.
| Glossary Term | Definition |
|---|---|
| Franchise Tax Credit for Certain R&D Activities | A state tax incentive reducing Texas franchise tax liability for eligible research and development activities. |
| Qualified Research Expenses (QREs) | Costs eligible for the tax credit, primarily including wages, supplies, and contract research expenses. |
| Internal Revenue Code (IRC) Section 41 | Federal tax code section defining qualified research activities and expenses adopted by Texas law. |
| Qualified Research (IRC § 41(d) Definition) | Research undertaken to discover technological information for new or improved business components. |
| Research Conducted in Texas | Requirement that qualified research activities must physically occur within Texas to be eligible. |
| Taxable Entity (Chapter 171, Texas Tax Code) | A legal entity, such as a corporation or LLC, subject to Texas Franchise Tax. |
| Combined Group | Affiliated taxable entities that file a single franchise tax report as a unitary business. |
| Taxable Margin | The calculated tax base upon which the Texas Franchise Tax liability is computed. |
| Credit Carryforward (Maximum 20 Consecutive Reports) | Unused R&D tax credits may be carried forward for up to 20 consecutive years. |
| Prior Law R&D Credit (Subchapter O Carryforward) | Refers to carryforwards from the previous Texas R&D credit program under Subchapter O. |
| Current Law R&D Credit (Subchapter M) | The current statutory framework governing the Texas R&D tax credit effective from 2014. |
| Tax Credit Limitation (50% of Franchise Tax Due) | The total credit claimed cannot exceed 50% of the franchise tax liability for the period. |
| Franchise Tax Report (Form 05-158-A or 05-158-B) | The primary annual tax return forms filed by taxable entities in Texas. |
| Credits Summary Schedule (Form 05-160) | The form used to summarize all tax credits claimed, including R&D, against franchise tax. |
| Research and Development Activities Credits Schedule (Form 05-178) | The specific form detailing the calculation of the Research and Development tax credit. |
| Sales and Use Tax Exemption for Qualified R&D | An alternative incentive exempting purchases of depreciable tangible personal property used in R&D. |
| Depreciable Tangible Personal Property (Sales Tax Exemption) | Physical property with a useful life exceeding one year used for qualified research. |
| Directly Used (Sales Tax Exemption) | Property makes a direct contribution to the product, processing, or research activities. |
| Qualified Research Registration Number (Comptroller) | A unique number issued by the Comptroller required to claim the sales tax exemption. |
| Annual Information Report (AIR) | A mandatory report filed annually by entities subject to the Texas Franchise Tax. |
| Tax Code Section 151.3182 (Sales Tax Exemption) | The specific statute authorizing the sales and use tax exemption for R&D property. |
| Tax Code Chapter 171, Subchapter M | The subchapter of the Texas Tax Code detailing the Franchise Tax Credit for R&D. |
| Tax Code Section 171.651 (Definitions) | Statute providing legal definitions for terms used within the R&D credit legislation. |
| Tax Code Section 171.653 (Ineligibility for Credit) | Specifies conditions under which a taxable entity is ineligible to claim the R&D credit. |
| Base Amount (50% of Average Prior 3 Years QREs) | The benchmark amount based on historical R&D spending used to calculate the credit. |
| Alternative Simplified Credit (ASC) Methodology | A calculation method using a fixed percentage of QREs exceeding a base amount. |
| No Existing Base Amount Credit Rate (2.5% of QREs) | A reduced credit rate applied when a company has no prior QRE history. |
| Internal Revenue Code (IRC) Section 174 | Federal code governing the deduction and amortization of research and experimental expenditures. |
| In-house Research Expenses | Expenses for wages and supplies incurred directly by the taxpayer for research activities. |
| Contract Research Expenses | Amounts paid to third parties to perform qualified research on behalf of the taxpayer. |
| Wages for Qualified Services | Salaries paid to employees for performing, supervising, or supporting qualified research activities. |
| Supplies Used in the Conduct of Qualified Research | Tangible property consumed during the research process, excluding land and depreciable property. |
| Property of a Character Subject to Depreciation (Exclusion) | Depreciable assets (like machinery) are excluded from QREs, unlike supply costs. |
| Funded Research (Exclusion) | Research paid for by another party (grant or contract) is ineligible for the credit. |
| Substantial Rights to the Results of the Research | The taxpayer must retain rights to use the research results for it to qualify. |
| Research After Commercial Production (Exclusion) | Activities occurring after a product is ready for commercial production do not qualify. |
| Adaption of Existing Business Component (Exclusion) | Modifying an existing product for a specific customer requirement is generally excluded. |
| Duplication of Existing Business Component (Exclusion) | Reverse engineering or reproducing an existing product without innovation is excluded. |
| Research in the Social Sciences, Arts, or Humanities (Exclusion) | Research in non-technical fields like psychology or sociology is ineligible for the credit. |
| Internal-Use Software Research (Exclusion, former rule) | Software developed for internal administrative functions has stricter qualification criteria. |
| Institution of Higher Education Contract (Enhanced Credit Rate) | Contracts with universities for research may qualify for a higher credit calculation rate. |
| Technological in Nature | The research must rely on principles of physical or biological sciences, engineering, or computer science. |
| Elimination of Uncertainty | The research must be intended to discover information to eliminate capability or method uncertainty. |
| Process of Experimentation | A systematic process of evaluating alternatives to achieve a result where the outcome is uncertain. |
| Business Component | Any product, process, software, technique, formula, or invention held for sale or use. |
| New or Improved Business Component | The objective of the research must be to create or significantly improve a business component. |
| Tax Administrator (Texas Comptroller) | The state official responsible for administering the Texas franchise tax and R&D credit. |
| Comptroller of Public Accounts | The Texas state agency that oversees tax collection and R&D credit compliance. |
| Tax Year (For Credit Calculation) | The accounting period for which the franchise tax and associated R&D credit are calculated. |
| Depreciable Property (IRC § 167 or 168) | Tangible property subject to depreciation under federal tax law, relevant for exclusion rules. |
