Texas R&D Credits Explained

Texas has strongly supported the federal government’s R&D tax credit policy and has gone ahead in expanding the purview of the tax credits in the state. Unlike the Federal R&D Tax Credit that allow companies to lower their federal income tax bill, the Texas R&D credit can be used by companies to obtain sales/use tax exemption and lower franchise tax returns.

What Is Sales/Use Tax Exemption?

According to the new laws passed by the Texas State government, the Texas R&D credit can be also used for gaining exemption on sale/use tax for lease/sale of depreciable tangible personal property that was directly used for qualified research. However, the taxpayer is required to register with Comptroller office before claiming exemption on qualified purchases.

What Is Franchise Tax Credit?

The R&D credit proposed by Texas state government can be used by companies to lower their Franchise Tax returns bill. The franchise tax credit is not available for companies who have used Texas R&D credit to obtain sales/use exemption during that financial period. The Franchise tax credit is limited to 50% of the franchise tax amount due for that period.

What Are the Credit Rates for Franchise Tax?

• 2.5% for companies who did not work through a university and have less than three years of qualified research expenditures.
• 3.125% for companies who worked through a university and have less than three years of qualified research expenditures.
• 5% for companies who have three years of qualified research expenditures but did not work through university.
• 6% for companies who have threeyears of qualified research expenditures but worked through a university.

Who Is Eligible for Texas R&D Credit?

If you are wondering whether your business qualifies for the R&D credit, here are some qualifications guidelines that will help you find if your company is entitled to receive tax credit.

Medical/Scientific R&D

If your company is involved in medical or scientific R&D activities such as clinical research on diseases, developing new medical equipment, development of medicines or pharmaceuticals, you are eligible for Texas R&D credit. This kind of research is of great value to the society and state and hence the Texas government provides R&D tax credit for such research.

Prototypes and Inventions

If your company is involved in the development of prototypes, new machines, software or minerals, your company is eligible for Texas R&D credit.

Process Improvement Activities

The R&D credit are also available for companies which spend on research to create new processes/applications or improve the existing ones. This is applicable for businesses, scientific/medical processes that are new or are reworked in an innovative manner. The refinement of ideas takes considerable time and money and hence such types of R&D activities are included in the qualified research. All types of businesses qualify for such R&D credit including startups.

If the research and development activities in your company fall in any categories mentioned above, you are eligible to receive Texas R&D credit and use them to reduce your Franchise tax bills or use it to gain sales/use exemption on lease or purchase of property used in qualified research in Texas.

Do you have any questions regarding Texas R&D credit? Let us know your comments below.

Swanson Reed is a leading specialist in Research and Development (R&D) tax credit advisors that help start-ups, small & mid-sized businesses and large innovation companies in Texas ( SwansonReed/Research-and-Development-Tax-Credit ), California, Florida and rest of the US claim R and D tax credits and incentives. To learn more about us, visit Swansonreed.Com/About-us.

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