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Texas provides a Research and Development (R&D) Credit to incentivize investment in the state. This includes qualified small businesses as well as larger more established companies. Enacted in 2014, the Texas R&D credits may be applied one of two ways:
Determining how to use the credit is part of Strike's analysis and is dependent on your specific financial position. The taxpayer can only choose one method each year.
Texas R&D credits calculated for the current tax year are applied to the Franchise Tax Report in the subsequent tax year. Therefore, for R&D tax credits calculated based on 2022 expenses, those credits will be utilized on the 2023 Franchise Tax filing. If a Company decides to use the credits toward the Franchise Tax Credit, the credit amount equals 5% or 6.5% of the difference between:
The credit is claimed using a Long Form Franchise Tax Report (05-158-A and 05-158-B) with a Credits Summary Schedule (05-160) and a Research and Development Activities Credits Schedule (05-178). The forms can also be submitted electronically using the Texas Comptroller's portal.
If a taxpayer chooses to use the R&D credit toward sales and use tax, the credits are calculated in the same manner (5% or 6.5% of excess QREs over the prior three-year average QREs). The taxpayer must apply online for a Registration Number and complete Form 01-931 (Texas Qualified Research Sales and Use Tax Exemption Certificate). This certificate is presented when purchasing qualifying items.
The company must register with the Comptroller’s office, and the taxpayer cannot apply for the franchise tax credit in the same tax period as using the sales and use tax exemption certificate.
Recent changes to the Texas state R&D requirements [34 Tex. Admin. Code Section 3.599 (Section 3.599)] have restricted a combined group’s ability to carryforward tax credits if the combined group changes members. However, this is a positive change. Previously, the Comptroller considered a combined group as a new taxable entity if there was any change in membership, and consequently wouldn’t allow credits to carryforward. Now, each member of the original group reported on the franchise tax report can carryforward tax credits individually.
The 2022 Amendments roll back the definition of Internal-use Software (IUS) to the pre-November 2016 federal definition. Now the Comptroller defines IUS as "computer software developed by, or for the benefit of, the taxable entity primarily for internal use by the taxable entity.”
The change also defines what IUS is not. Any software “sold, leased, licensed, or otherwise marketed for separately stated consideration to unrelated third parties” can’t be considered part of the qualified research activities.
The amendments also affect pilot models and prototypes. They will not follow the updated federal regulations.
With these more stringent requirements, research and development credits may be more difficult to qualify for in Texas. Having a specialty tax firm that understands the intricacies of Texas tax law will help you claim the credits you’re owed.
Learn more about Texas R&D Tax Credit law from the Texas Comptroller!
R&D Tax Credit Available:
C-Corporation, S-Corporations, LLCs, Partnerships
Deadline for Tax Filing:
Franchise Tax Form due May 15th (or extended to November 15th)
Data Required to Compute Credit:
Claim Period Texas Qualified R&D Expenses (QREs)
What Information is needed?
Texas QREs for Prior 3 Years
To get an estimate of the potential value of your unclaimed R&D Tax Credits, try out our credit calculator.
Download our R&D Tax Credit Calculator for Android to see how much you can receive from your qualified R&D tax credit expenses.