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Texas R&D Tax Exemptions and Credits

Purpose of Legislation

Texas desires to enhance research and development (R&D) investment within its borders.  Consequently, on May 25, 2013, the Legislature submitted HB 800 to the Governor, which would allow a company a choice between a sales tax exemption for software and equipment used for R&D or a franchise tax credit for increased Texas R&D activity.  The choice appears to be an annual election, and is effective January 1, 2014.

Sales Tax Exemption
Depreciable tangible personal property with a useful life that exceeds one year and is used directly in qualified research will be exempted from sales/use tax.  This exemption requires the taxpayer to certify that it will not claim a franchise tax credit for its R&D activity in the same period.
 
Franchise Tax Credit
HB 800 also allows a franchise tax credit for increased Texas-based qualified research expenses.  The normal 5.0% tax credit is based on the increase above 50% of the average amount of qualified research expenses incurred in Texas during the three tax periods preceding the period on which the report is based.  If the entity has no qualified research expenses in any of the three years prior to the report year, then the credit is equal to 2.5% of the qualified research expenses during that report period.

In a time when partnering with local colleges and universities appears to be more prevalent, if the taxable entity contracts with one or more public or private Texas institutions of higher education to perform the qualified research, the credit will increase to 6.25%.  The rate will be 3.125% if the entity has no qualified research expenses in any of the three years prior to the report year.

The credit is limited to 50% of the franchise tax on a combined report basis and unused credits may be carried forward for 20 consecutive reports.  Rules and forms still need to be adopted by the Comptroller.

To review HB 800, please click here.
http://www.capitol.state.tx.us/tlodocs/83R/billtext/pdf/HB00800F.pdf

With 20 years of experience, Gary Bingel's expertise focuses on state and local income taxation, and also includes sales and use tax consulting. Gary is Partner-in-Charge of EisnerAmper's State & Local Tax Group.

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