Texas Issues Guidance on Franchise Tax Credits and Carryforward

By Bill Taylor | Principal, Research & Development Tax Credits

Recently, the Texas Comptroller’s Tax Policy Division issued guidance on how to apply multiple franchise tax credits and credit carryforwards when more than one is available. The updated guidance clarifies the order in which credits should be applied to maximize tax benefits for taxable entities.

Key Franchise Tax Credits

Several credits are available to Texas taxpayers:

    • 2008 Temporary Credit for Business Loss Carryforward: Based on losses prior to 2008, this credit can be applied against the full tax due, with carryforwards usable until September 1, 2027.
    • Clean Energy Project Credit: Available to entities operating certified clean energy projects, it can be carried forward for up to 20 years, applied after all other credits.
    • Historic Structure Credit: For investments in certified historic structure rehabilitation, this credit can be carried forward for up to five years, applied after other credits.
    • Research and Development (R&D) Credits: These credits, available for qualified research activities, can be carried forward for 20 years. Subchapter O credits must be applied before Subchapter M credits, and both carryforwards must be applied before current-year credits.
    • Housing Developments Credit: Available for qualified housing projects, this credit can be carried forward for up to 10 years and carried back for up to three years, subject to certain timing rules

Application of Credits

The Comptroller’s guidance specifies the order in which to apply credits and carryforwards:

    1. R&D Credits: Apply Subchapter O R&D credit carryforwards first, followed by Subchapter M carryforwards, then current-year credits.
    2. Other Credits: Clean Energy, Historic Structure, and Housing Development credits must be applied in order of their statutory adoption, with carryforwards applied before current-year credits.
    3. 2008 Temporary Credit: This credit can be applied in any order relative to other credits, as its expiration date is fixed for September 1, 2027.

Conclusion

This guidance helps taxpayers navigate the complex interaction of available credits, ensuring they maximize their franchise tax benefits. Businesses should follow the outlined order of application to optimize their credit usage and plan for future tax filings. Consulting with credentialed tax professionals, like KBKG, is recommended to ensure compliance with these updated rules.

About the Author

Bill Taylor | Principal – Research & Development Tax Credits

Bill Taylor is a Principal for KBKG’s Research and Development (R&D) Tax Credit Consulting practice. Based in Dallas, TX, Bill has over 10 years of experience providing federal tax consulting services to companies of all sizes within various industries, including technology, aerospace and defense, manufacturing, oil and gas, gaming, banking, and other professional services… Read More