Texas - Tax credit for R&D activities 

June 11:  Legislation that has passed both houses of the Texas legislature and is pending action by the governor would, if enacted, provide a tax credit for certain research and development (R&D) activities in the state.

The legislation (HB 800) would offer taxpayers a choice of:

  • A franchise tax credit for R&D expenditures, or
  • A sales tax exemption for purchases of equipment and software used in qualified research in Texas

Thus, the legislation would allow taxpayers to elect to offset their Texas franchise tax liability with the Texas R&D credit.

The Texas R&D credit also would provide an incentive for taxpayers to contract with institutions of higher education to perform qualified research in Texas.

If enacted, the R&D credit would be effective January 1, 2014, and would expire December 31, 2026.

Elements of the Texas R&D credit

Elements of the Texas R&D tax credit are summarized below.

  • Eligibility - In general, taxpayers would be eligible for the Texas R&D credit if they have qualified research expenses (QREs) as defined by IRC section 41 during the tax period. However, taxpayers would not be eligible for the Texas R&D credit during a tax period if the taxpayer (or a member of the taxpayer’s combined group) received the newly created sales tax exemption, under Texas Tax Code Section 151.3182, for purchases of equipment or software used in qualified research in Texas.
  • QREs - “Qualified research expenses” are defined for these purposes as all IRC section 41 expenses conducted in the state of Texas, including wages, supplies, and contract research expenses.
  • Credit amount - Similar to the methodology used to calculate the federal “alternative simplified credit,” in general, the Texas R&D credit would be 5% of the difference between the QREs incurred during the tax period (“current period QREs”) and 50% of the average QREs incurred during the prior three tax periods (“base amount”).
  • Institutions of higher education - If the taxpayer contracts with a public or private institution of higher education for the performance of qualified research in the state of Texas, the tax credit would increase to 6.5% (1.5% increase) of the difference between the current period QREs and base amount.
  • No existing base amount - If a taxpayer has no base amount, the credit would be equal to 2.5% (3.125% if contracted with an institution of higher education) of the current period QREs.
  • Credit ceiling - The allowable credit in any one tax period, including any carryforward amount, could not exceed 50% of the taxpayer’s franchise tax due for the period.
  • Credit carryforward - The amount in excess of the credit ceiling could be carried forward for a maximum of 20 consecutive tax periods.
  • Application for credit - An eligible taxpayer would apply for a credit by including the necessary information on or with the tax report for the tax period for which the credit is claimed.

For more information, contact a KPMG tax professional:

Michael Fishman

(214) 840-6966

Chris Kachinsky

(212) 872-2187

Adam Boyar

(213) 955-8332

Doug Maziur

(713) 319-3866

Chris Bajec

(214) 840-2719

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