Texas – New Research and Development Exemption and Tax Credit

SALT Report 2581 –Texas recently enacted legislation that provides either a sales tax exemption or a franchise tax credit to entities who conduct qualified research and development activities in the State. Specifically, House Bill 800 amends chapters 151 and 171 of the Tax Code to provide an exemption for depreciable tangible personal property directly used in qualified research. The sales and use tax exemption and the franchise tax credit are effective on January 1, 2014 and expire on December 31, 2026.

Sales Tax Exemption

Under the provisions of the Bill, depreciable tangible personal property used directly in qualified research will be exempt from sales and use tax if the property is sold, leased, rented to, stored or used by, a person who:

  • Is engaged in qualified research as defined in IRC §41, and
  • Will not, as a taxable entity or as a member of a combined group, claim a Texas franchise tax credit on a franchise tax report for the period during which the sale, storage, or use occurs

Depreciable tangible personal property is defined as tangible personal property that has a useful life of more than one year and is subject to depreciation under the accounting principles in IRC §167 or 168.

Franchise Tax Credit

A franchise tax credit is available to businesses that perform qualified research in the State. The franchise tax credit will be calculated at 5% of the difference between the entity’s qualified research expenses during the period for which the tax report was based and 50% of the average amount of qualified research expenses over the three previous tax reporting periods.

For those businesses that contract with a public or private higher education institution to perform qualified research they will be eligible for a franchise tax credit in the amount of 6.25%. This will be calculated based on the difference between all qualified research expenses incurred during the report period and 50% of the average amount of qualified research expenses over the three previous tax reporting periods. However, entities that have claimed the sales tax exemption cannot claim a franchise tax credit for the same tax period.

For purposes of the Bill, qualified research is defined by Section 41, Internal Revenue Code.

For Further Information

Texas State Legislature – House Bill 800, Laws 2013