R&D Tax Credit: How Will it Affect Texas Businesses?

The House and the Senate recently signed into effect House Bill 800, a piece of legislation that effectively re-introduces the R&D (Research and Development) tax credit for Texas companies. But what does HB 800 really mean for your business in Texas? How does the new legislation work for companies involved in technology or science? And can your company claim for R&D tax credits if you are not working within the technological field? Here are some of the crucial elements of HB 800 and how it could affect you.

Intention and Rationale

Economic activity in Texas makes up more than 8 percent of total economic activity in the US. However, only 5 percent of the total spending on research and development comes from Texas. When companies engage in R&D they encourage economic growth and competitiveness in the state by bringing in skilled workers, creating higher-paid jobs, and in turn driving the economy. The House Bill 800 is an attempt by the state for businesses to become more competitive and to incentivize innovation and experimentation within companies that will ultimately drive a high-value Texas economy. The legislation applies to research and development activities that take place within Texas. There is the option for businesses to benefit from a sales tax exemption or take franchise tax credit.

Sales Tax Exemption and Franchise Tax Credit

HB 800 provides tax exemption on property directly related to or used in qualified research activities, or is sold to someone or used by a person that takes part in qualified research activities. If a Texas business takes this option and exempts its property from sales and use tax, then they cannot take franchise tax credit for research and development.

Companies engaging in qualified research activities can claim franchise tax credit against the expense incurred through these activities. In general, the same exceptions and qualifying criteria apply as in federal credit except that for the Texas bill the research activities must take place within the state of Texas. A company can claim credit based on its research expenses over the base amount of 50 percent of the average of the company’s previous three years of research costs.

Research Credit: What You Need to Know

The amount of credit available is 5 percent for a business that has research expenses going back three years, and 2.5 percent for businesses that do not have three years’ prior research expenses. In addition, businesses can claim credit when working with a higher education institute to perform research tasks. In general, R&D tax credits apply to activity in the scientific and technological field that brings about innovation in products or processes. The total amount of credit that a company can claim every year cannot go over 50 percent of the franchise tax calculated for the business. Unused credit can be carried forward for the following 20 years.

The tax credit scheme is not permanent but lasts until 2026. The reintroduction of this credit is a benefit for any company wanting to stay affront of competition and develop innovative products or ways of working. The time is now to calculate how to take advantage of sales and use tax versus the benefits of franchise tax credit.