R&D Tax Credits in Texas: Navigate With Care

If your company engages in research and development as a routine part of doing business, chances are you know a bit about the checkered history of government policy concerning credits for domestic spending on research. As part of the already intimidating tax code, the “ins and outs” of these credits can and do vary, depending on the state in which your business operates and the types of credits you seek.

If you’re a business owner in Texas, here are some basics, a recent development — and a cautionary tale.

Two Methods, One Aim

On a federal level, Congress generally has aimed at keeping these tax credits in proportion to any given firm’s domestic revenues. In other words, rather than specific dollar amounts (which would be bedlam to administer), the R&D credits have as their basis a benchmark of a period of time in which your business spent a consistent percentage on R&D. For example, if during a given five-year period your business spent 2 percent of every dollar on domestic research, then during years when you spend 3 percent or more, you would be entitled to file for a R&D tax credit (the “before tax” credit rate being 20 percent).

By contrast, the alternative “simplified credit” option eliminates the need for historical tracking of percentages in favor of what’s called a “moving average” (a three-year figure) instead. Using this method, businesses can claim a credit for any expenses that exceed 50 percent of this three-year “moving average” figure (the “before tax” credit rate in this instance being 14 percent).

Which Is Open to Me?

This can depend on various factors, the simplest being where you are doing business. In some states, the alternative simplified credit (ASC) option is not applicable to certain types of corporations; in those cases, you often have differing methods of calculating percentages you can claim as well.

Some recent tax legislation proposes, for example, that businesses building prototypes that are later sold would still be able to claim some tax credit on the research, engineering, and development costs going into those prototypes — something that has caused more headaches and disputes over the years than maybe any other R&D credit question.

The good news? Twofold: First, as the Washington Post puts it, “There’s a war over R&D tax credits, and companies keep winning.” Second, even though R&D tax credits expire, individual states can enact tax law designed to encourage business development and new business openings.

In the case of the state of Texas, its economy accounts for more than 8 percent of the U.S. economy but only 5 percent of R&D spending. In answer to this is HB 800, an R&D tax credit law designed to make Texas more economically competitive, reduce the R&D tax burden, promote good jobs, and make manufacturing innovations worth the investment of time and money.

However…

There’s a caveat in here that we know you see: your recordkeeping should be as flawless and thorough as you can make it.

Texas-based Trinity Industries, Inc., one of North America’s largest manufacturers of transportation, construction and industrial products, is appealing a $5 million tax credit dispute in which the court rejected more stringent government interpretations of the law in favor of the taxpayer. This was good news on one level; however, Trinity Industries actually lost a sizeable amount of the R&D credit solely to their lack of project-level documentation.

How much documentation is enough? That’s a question for a professional R&D tax credit consultant; it’s well worth your while to make sure you have appropriate guidance to maximize your benefits and get the rightful credits that are due your business.

Click here to read the full Trinity Industries, Inc. v. United States of America