7 Elements of Texas Tax Credit Law
Businesses located in Texas or doing business in the state can now claim significant tax credit incentives for R&D in the Research and Development Tax Credit scheme. These credits were available in the early 2000’s and are again relevant to Texas business with the passing of House Bill 800 in the Texas legislature. This R&D bill has an expiry date of 2026, leaving plenty of opportunity for businesses to claim for research and experimentation activity. Companies that design products, manufacture items, invent processes or develop software and techniques all stand to benefit from lucrative R&D tax breaks. Here are seven key elements of the tax credits bill as it affects Texas business.
- Legislation Coverage The House Bill 800 legislation offers Texas taxpayers a choice between franchise tax credits related to R&D expenses, or sales tax exemption that is designed for the purchase of software or specialist equipment that allows a business to undertake qualified research. In addition, the credit allows businesses to work with higher education institutes to undertake periods of qualified research.
- Eligibility Eligibility for R&D tax credits is somewhat complex and businesses are advised to seek advice on qualifying criteria from tax incentive experts. In general, a business would be eligible for the research and development tax credits if it is undertaking qualified research for which the business incurs expenses. The definition of Qualified Research Expenses is defined for Texas state purposes as all IRC section 41 expenses. These include supplies and wages along with contract research costs.
- Amount The Texas R&D tax credit is calculated at 5 percent of the difference between the Qualified Research Expenses affecting the current tax period and 50 percent of the average expenses incurred throughout the previous three tax periods (also known as the base amount).
- Exceptions If the business has no base amount then the tax credit is equal to 2.5 percent of the Qualified Research Expenses incurred in the current period. In addition, if the business is working with a higher education institution to develop R&D schemes, the amount of tax credit available rises to 6.5 percent of the difference between current Qualified Research Expenses and the QRE base amount.
- Limit The credit ceiling in any one tax period cannot go higher than 50 percent of the business’s franchise tax for the tax period in question. Any amount in excess of this credit ceiling may be put forward to the next tax period, for a total of 20 consecutive periods if necessary or required.
- Availability Tax credits for R&D are not limited to businesses in the scientific sector but include all industries. For example, companies in the IT, engineering, oil and gas, food processing, construction, chemical, waste management, and agriculture sectors are all potential beneficiaries.
- Application Procedure Any business wanting to make a claim for R&D tax credit should apply for the credit by making an application through the existing tax report for the tax period in question. Businesses in Texas can take advantage of the incentives at Federal and Texas State level at the same time. For more information, contact Texas R&D Tax Credit Solutions for detailed advice on claiming R&D tax credits and how your business can benefit from the new regulations.