On June 14, 2013, Texas Governor Rick Perry signed into law HB 800 reinstating the research and development (R&D) tax credit for Texas companies. Although not permanent, both the sales tax exemption and research credit are extended through 2026 and are expected to be a boost to Texas manufacturing and high-technology industries. Details regarding the legislation were previously provided in KBKG’s Tax Insights article on June 5, 2013.
The bill reinstates franchise tax credits for companies conducting qualified research and development (R&D) activities within the state. The Texas R&D credit was repealed in 2006, but proponents of the bill claim the tax incentives are vital to keep Texas competitive with states offering similar incentives to businesses. By increasing R&D activity in the state, Texas hopes to significantly increase revenue to the state and add nearly 100,000 new high-paying jobs within the state.
The new law provides Texas companies the option of selecting either a sales tax exemption on property purchased by persons engaged in qualified research activities (QRAs) or the franchise tax credit, but not both. The effective date for the sales tax exemption is January 1, 2014. The franchise tax credit applies to reports originally due on or after January 1, 2014. By providing taxpayers the option, Texas hopes to maximize the incentives offered to companies operating in the state.
- Sales Tax Exemption – The bill provides a sales tax exemption for property purchased, stored or used by a person engaged in qualified research. The property must be depreciable tangible personal property (having a useful life greater than one year AND can be depreciated according to GAAP or I.R.C. §§ 167 & 168).
- Franchise Tax Credit – The bill uses the definitions for “research” and “qualified research” that appear in federal tax law, except that these activities must occur within the state. A company conducting QRAs in Texas is eligible for a tax credit equal to 5% of the difference between a company’s qualified research expenses (QREs) during the tax year for which the credit is claimed and 50% of the average QREs for the three preceding tax years (base period). A company which has no QREs in one or more of the base period years may still claim the credit by selecting the reduced credit rate of 2.5% of credit year QREs.
Please note that this calculation is analogous to the federal alternative simplified credit (ASC). Another franchise tax credit is available to companies contracting with a higher education institution to perform qualified research on its behalf. The credit rates increase from those above to 6.25% and 3.125%, respectively.
The total credit being claimed is limited to 50% of the company’s franchise tax due. Credits in excess of the franchise tax may be carried forward 20 consecutive years and are non-transferrable. Companies may apply for the franchise tax credit on or with the state tax return originally due on or after January 1, 2014. The credit expires on December 31, 2026.