R&D Tax Credit in Texas

Qualifying for Research and Development Tax Credit

The United States government provides billions of dollars to companies each year for designing, developing, or improving new/existing processes, formulas, technologies, or products through the R&D tax credit program. The qualified businesses can use this credit to offset up to $250,000 annually in social security taxes. Simply put, this is the cheapest way to reduce tax liabilities and maximize capital for small businesses and startups. 

The best thing about research credit is that you can claim for it on both the federal level and state level, too. It means you can literally double your credits if your business is engaged in qualified research activities.

Does Texas Have an R&D Tax Credit?

Businesses in Texas can receive reductions in their taxes with specific qualifications. The Texas R&D credit is an excellent opportunity for taxpayers who conduct qualified research. This incentive, in addition to the federal credit program, allows you to take advantage of two great incentives at once. 

The state of Texas has put a program in place which exempts sales or franchise tax credit for eligible research activities. The primary motto of this initiative was to encourage the growth and expansion of research and development in Texas. As per the current norms, it will expire on 31st December 2026.

This program allows qualified companies to claim one of the following:

• A franchise tax credit depending on eligible research expenses.
• A use and sales tax exemption on the use, storage, rental, lease, or purchase of tangible personal property that is directly used in eligible research activities.

To claim this credit, it is essential for your r&d activities to be counted as qualified research activities defined by the Internal Revenue Service Code of 1986, Section 41(d). In addition, the expenditure for your research work should be counted as expenses defined by the Internal Revenue Code Section 174.

The standard definition of qualified research given by the IRS — “the research must be undertaken for discovering information that is technological in nature, and the person undertaking the research must intend to develop a new or improved business component. Substantially all of the research activities must be part of an experimentation process relating to a new or improved function, performance, reliability, or quality.”

Note: The same individual cannot claim both the franchise tax credits and sales tax exemption for the same period.

What Do You Need to Claim for Research Credit in Texas?

Companies must register with the Comptroller’s office first to claim for Texas R&D tax credit. You can do the registration online or by filling out Form AP-234 — Texas Registration for Qualified Research and Development Sales Tax Exemption.

Post successful registration, each business gets a unique Texas Qualified Research Registration Number. You need this number when filling the  Form 01-931 — Texas Qualified Research Sales and Use Tax Exemption Certificate (This form is filled to claim the sales tax exemption credit).

The application process for the franchise tax credit is a bit different. In order to claim it, companies have to file a Long Form Franchise Tax Report (05-158-A and 05-158-B) with Research and Development Activities Credits Schedule (05-178) and Credits Summary Schedule (05-160).

Preparing Documents for Texas Research and Development Credit

While it’s true that R&D tax credit can yield a large amount of money, claiming it is a bit of a tedious process. You not only have to fill several forms but also the documentation must satisfy the strict criteria like:

• All your documents must be dated. You have to prove that the work you are claiming occurred in the same fiscal year.
• The documentation should be contemporaneous. It should be done at the same time when research and development work is done. With more claims, comes more documentation.
• Technical challenges must be highlighted in your claim.

Work With The Best Tax Consultants to Maximize Your Credits

Given the complexities in the Texas R&D tax credit claiming process, consider working with our experienced tax consultants to maximize your credits. Combining the experience, skills, and knowledge of our in-house R&D tax experts, we can help your business get bigger returns. 

We provide expertise in how to apply for the R&D Tax Credit in Texas through developing business plans and preparing tax returns. Having served hundreds of startups, our specialists know how to go about applying for it. 

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