R&D Tax Credits in Texas

In the state of Texas, the R&D tax credit is called the Texas Research and Development Tax Credit. Any corporations and flow-through entities can apply, and unused credit can be carried forward 20 years. Beginning with any tax returns filed after January 1, 2014, Texas taxpayers can claim the state-wide R&D tax credit to offset a portion of their franchise tax. Taxpayers may also choose to use it towards sales and use tax exemption on the purchase or lease of depreciable, tangible property, which is used in qualified research in Texas.

Sales and Use Tax Exemption

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.

Texas Franchise Credit

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 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.

Case Study 

A manufacturing company in Dallas, TX began operations in 2008. The company has been claiming the federal and state R&D Tax Credit since 2012.

Summary of credits:

Texas R&D Credit Form 

Click here to view.