Texas Adopts New Rule Regarding Research and Development Activities Credit

Summary

On March 30, 2015, the Comptroller of Public Accounts, adopted 34 Texas Administrative Code (TAC) § 3.599 which provides either a franchise tax credit or sales tax exemption for research and development activities conducted in Texas. The effective date of this provision is for reports due on or after January 1, 2014. 

Discussion

The new rule 34 TAC § 3.599 implements House Bill (HB) 800, 83rd Legislature 2013, which added Tax Code, Chapter 171, Subchapter M to create a mechanism for taxpayers to either claim a credit against their franchise tax report or a sales tax exemption for expenses incurred in conducting certain research and development activities. The new rule covers many important compliance topics including, but not limited to, the credit effective date and eligibility requirements; general method for calculating the amount of the credit; maximum allowable credit per report; credit carryforwards; and credit application, schedule, and forms. 

It is important to note that the credit cannot be assigned, conveyed or transferred unless all of the assets of the taxable entity are also transferred in the same transaction. 

The new rule aims to strengthen incentives for research and development that are scheduled to expire on December 31, 2026. Taxpayers have a unique opportunity to carryforward any unused credit established before the expiration of 20 consecutive reports. 

How does this affect my business?

This rule provides significant benefits to Texas taxpayers engaged in qualified research, as defined by IRC § 41(d). Since many taxpayers have conducted extensive studies to determine their federal research and development credit, Texas has joined the many other states that offer a complementary state tax research and development credit. In addition, since a Texas taxpayer can make a yearly election to take either a franchise tax credit or a sales tax exemption, we recommend that this issue should be analyzed yearly to obtain the maximum benefit.

For more information on the new rule 34 TAC § 3.599 and how it may apply to your business, please contact us.