Eligible businesses can receive Texas R&D tax credits and a federal R&D tax credit.
Everything’s bigger in the Lone Star state and so are the incentives for intrepid entrepreneurs creating new products. Incredibly helpful tools for business owners, Texas R&D tax credits are a resource that should not be ignored. If you’re operating a business in Texas, keep reading to discover how this resource can reduce your tax burden. To learn more about R&D tax credits, check out more of Bowers R&D’s free guides.
What Are R&D Tax Credits?
As stated under Internal Revenue Code section 41, R&D tax credits reward innovative companies that incur research and development expenses in the United States. The program has been active since the 1980s and has provided billions of dollars every year to inventive businesses for developing new or improving existing technologies, products, materials, and processes.
While the federal R&D program is open to businesses in any state, it’s not the only reward available to imaginative entrepreneurs. Texas offers a robust R&D tax credit program too.
Texas R&D Tax Credits
Unlike the federal R&D tax credit, which is a permanent part of the U.S. tax code, the state of Texas’ program faces a 2026 expiration date. With this deadline looming, it’s imperative that business owners take advantage of this credit while they can. Be aware that you must conduct your R&D in Texas to receive this state credit.
If you have, then your Texas R&D credit may be applied either as a Franchise Tax Credit or as a Sales and Use Tax Exemption. The latter is designed to reduce the financial burden of the purchase, rental, storage, or lease of depreciable tangible personal property used in Texas.
What Counts as R&D Activities in Texas?
Texas closely follows the IRS’ guidelines to determine qualified research costs, and, according to the IRS, you can only use these three items to calculate your credit:
- Wages – People who are engaged in qualified research, directly supervising qualified research, or directly supporting qualified research
- Supplies – Materials used directly for qualified research activity. This does not include land, telephone expenses, relocation, professional dues, or royalties/licenses
- Contract research expenses – Wages and expenses related to hiring contractors
These items are known as qualifying research expenses (QRE). Recognizing what counts as a QRE is crucial for your credit estimation. For example, hiring an external marketing team to create QA surveys of your new product is not a QRE. Of course, if you hire an outside contractor to help build a prototype of your product, that is a QRE.
So, do you qualify for an R&D tax credit? Take our free online test to find out.
How Much is a Texas R&D Tax Credit Worth?
Applying for an R&D credit is well worth the effort. Your Texas business could claim:
- 5% of the difference between the QRE incurred during the tax year, and 50% of the average QRE costs incurred during the three tax periods prior to the period that your tax report is based on.
- 2.5% in tax credits for the QRE incurred during that period if no QRE were incurred during one or more of the three tax periods prior to the period that your tax report is based on.
Now, Texas is one of the few states that uses its credit program to encourage relationships between private industries and institutions of higher learning. Bear in mind that the percentages of your credit will change if your business works closely with an institution of higher education. If this is the case, you can expect to receive:
- 6.25% of the difference between all qualified research expenses incurred during the period on which the report is based, and 50% of the average amount of all qualified research expenses incurred during the three tax periods preceding the period on which the report is based if your business performed qualifying research activities in contract with one or more public or private institutions of higher education
- 3.125% if the business has no qualified research expenses in one or more of the three tax periods preceding the period on which the tax report is based, it can claim 3.125% in tax credits for the expenses incurred during that period.
Remember, these figures will compound with your federal R&D tax credit. Let’s say that your total QRE equals $135,000. Between the federal and Texas R&D credits, your total credit could be as much as $18,500. That’s money you can reinvest in your business or save — the choice is yours. Use our free R&D tax credit calculator to see how much your credit could be.
How to Claim a Texas R&D Tax Credit
Since there are two ways you can use your credit in Texas, there are two different ways to apply for it.
You need to register with the Texas Comptroller in order to apply for this state credit. You can register online or submit Form AP-234, Texas Registration for Qualified Research and Development Sales Tax Exemption. Once you’re registered, you’ll receive Texas Qualified Research Registration Number. You’ll need this number to complete Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate, which is a necessary step to claim the sales tax exemption.
When applying for the franchise tax credit, you’ll need to file a Long Form Franchise Tax Report (05-158-A and 05-158-B) with a Credits Summary Schedule (05-160) and a Research and Development Activities Credits Schedule (05-178). These specifications vary from that of the federal R&D tax credit which allows business owners to reduce their payroll or business income tax, depending upon certain criteria.
What You Need to Know About Texas R&D Tax Credits
While many states offer R&D tax credits for businesses, Texas takes a different approach to this incentive program. Entrepreneurs of the Lone Star state can receive their tax credits in the form of a sales tax exemption or a franchise tax credit. This opportunity can help you recoup funds spent on your QRE. In order to maximize your credit, it’s best practice to work with an R&D tax credit expert.
That way, you can rest easy knowing that your application has been properly reviewed and that you’re taking full advantage of both the federal and state programs. Contact Bowers R&D today and discover how much you could save on your taxes.