Texas R&D Tax Credit
On June 14, 2013, House Bill 800 was signed reinstating Texas R&D tax credits through 2026. Much of the work done on a federal R&D tax credit return applies to a Texas return, so you can essentially get two tax credits for one tax workup.
In order to achieve a benefit from R&D in Texas, the taxpayer makes one of two elections ; the franchise tax credit for R&D expenditures or the sales and use tax exemption on the purchase or lease of depreciable, tangible personal property used in qualified research in Texas.
Texas Franchise Tax
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 rates used to calculate the credit hinge on whether or not the taxpayer worked through a university and how many years the credit is being claimed:
- Less than 3 years of QRE and did NOT work through a university = 2.5%
- Less than 3 years of QRE and did work through a university = 3.125%
- 3 years of QRE and did NOT work through a university = 5%
- 3 years of QRE and did work through a university = 6.25%
The credit is applied against the Franchise tax due, but cannot exceed 50% of the tax liability. 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.
Texas Sales and Use Tax
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.
For the exemption to apply, the property must have been used in qualified research in Texas, have a useful life greater than or equal to one year, and be depreciable under Generally Accepted Accounting Principles (GAAP). The statutory definition for “tangible personal property” is “personal property that can be seen, weighed, measured, felt, or touched, or that is perceptible to the senses.”