While many states provide research and development incentives as refundable tax credits, Texas takes a different approach. Here, R&D incentives come in the form of sales tax exemptions and franchise tax credits.
Texas’ system still gives your company plenty of ways to get money back for your R&D efforts. To maximize your claim, it’s smart to work with tax professionals who have the expertise to document your claim thoroughly and help reduce your tax bill. This way, your claim is well-supported in case of an audit, and you make sure you’re taking full advantage of every opportunity to lower your costs.
Want to learn more about R&D tax credits? Check out Boast’s comprehensive 20+ page guide.
What Are R&D Tax Credits?
The R&D Tax Credit program is a general business tax credit under Internal Revenue Code section 41 for companies that incur research and development costs in the United States. It has been around since 1981. Under the R&D Tax Credit program, the US government provides billions of dollars every year to innovative businesses for developing new or improving existing technologies, products, materials, and processes.
R&D Tax Credits in Texas
Texas’ R&D rules let businesses choose between a sales and use tax exemption on R&D expenses or a franchise tax credit for qualified expenses. The research must be carried out in Texas. The state launched its R&D tax credit program in 2014, and it’s currently scheduled to end in late 2026.
How To Claim Texas’ R&D Credits
To claim these state tax credits, your business must register with the Texas Comptroller’s office, either online or by submitting Form AP-234, Texas Registration for Qualified Research and Development Sales Tax Exemption.
Once registered, the Comptroller’s office will issue a Texas Qualified Research Registration Number. You’ll use this number to complete Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate to claim your sales tax exemption.
To apply for the franchise tax credit, you’ll need to file a Long Form Franchise Tax Report (05-158-A and 05-158-B), along with the Credits Summary Schedule (05-160) and the Research and Development Activities Credits Schedule (05-178).
Use Our R&D Tax Credit Calculator To Calculate Your Tax Refund
What Qualifies as R&D Expenses in Texas?
Texas follows the IRS definition of qualified research and expenses. You’ll find these definitions in Internal Revenue Code (IRC) Section 41(d) and Section 174. All research must meet these requirements:
- The research must be conducted to discover information that is technological in nature.
- The person or team conducting the research must intend to develop a new or improved business component.
- Essentially, all research activities must be part of an experimentation process related to a new or improved function, performance, reliability, or quality.
The categories defined by the IRS for qualifying expenses include:
- Wages – Employees directly involved in qualified research, supervising qualified research, or directly supporting qualified research
- Supplies – Materials used directly in qualified research activities. This does not include land, phone expenses, relocation, professional dues, or royalties/licenses
- Contract research expenses – Wages and costs related to hiring outside contractors
How Much Can Businesses Claim in R&D Tax Credits in Texas?
Depending on the type of research, businesses can claim 5% of the difference between qualified research expenses for the tax year and 50% of the average qualified research expenses from the three previous tax periods.
If your business had no qualified research expenses in one or more of the three prior tax periods, you can claim a 2.5% tax credit for expenses incurred during the current period.
If your company conducts qualified research in partnership with one or more public or private higher education institutions, you can claim 6.25% of the difference between all qualified research expenses for the current period and 50% of the average qualified research expenses from the three previous tax periods.
If your business had no qualified research expenses in one or more of the three previous tax periods, you can claim a 3.125% tax credit for expenses incurred during the current period.
Frequently Asked Questions About R&D Tax Credits
What can you recover with R&D tax credits?
R&D tax credits are available at both the federal and state levels. The federal credit is about 10% of eligible expenses and can be used to offset up to $250,000 per year in Social Security taxes, as well as income taxes or the alternative minimum tax (AMT). State credits vary by state.
What are the benefits of R&D tax credits?
You can use R&D tax credits to offset the employer portion of Social Security taxes, up to $250,000 per year.
The Social Security tax offset lets eligible small businesses benefit from their research activities, even if they aren’t profitable. R&D tax credits can also be used to reduce income taxes if you owe them, based on your previous tax returns.
R&D tax credits can also be used to offset the ??alternative minimum tax (AMT) if your average revenue for the last three years is under $50 million and you owe AMT this year.
How do you prepare documents for R&D tax credits?
While the R&D Tax Credit program can help your business recover a significant portion of your R&D spending, claiming these credits is complex. You’ll need to provide receipts and invoices as proof of your QREs.
The IRS and state revenue agencies have their own requirements, but many follow the federal guidelines for their state credits. Required documentation includes:
- Documents must be contemporaneous, meaning you need to record R&D expenses as they happen. The larger your claim, the more documentation you’ll need.
- You must prove the work was performed in the fiscal year you’re claiming. All supporting documents for QREs must be dated.
- Your claim should highlight technical challenges and provide evidence of the R&D work performed. These challenges should fit one of the four main categories (as defined by the IRS) that qualify as R&D.
Tax professionals with industry expertise can ensure your R&D tax credit claim is well-supported and provide clear explanations of your R&D activities in case of an IRS audit.
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Our team includes engineers and finance professionals with over 20 years of experience. We stay involved with your business year-round to spot R&D-eligible work and inform you about other technology grants and funding options.
If the IRS reviews your R&D claim, we’ll stand by you throughout the process to help ensure your claim succeeds. Contact us today for a free assessment and to get started on your next R&D claim.
