While many states offer research and development incentives for businesses in the form of refundable tax credits, Texas approaches R&D incentives differently. The state offers these incentives as sales tax exemptions and franchise tax credits.
Texas’ approach still provides ample opportunity for your business to get money back for your research and development efforts. To get the most out of your claim, it’s best to work with tax experts who have the firsthand knowledge and experience to document the claim well and reduce your tax bill. That way, your claim is thoroughly corroborated should your business be audited, and you’re taking advantage of all opportunities to minimize costs.
To learn more about R&D tax credits, check out Boast’s 20+ page ultimate 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 allow businesses to either receive sales and use tax exemptions on R&D expenses or to earn a franchise tax credit for qualified expenses. The research must be conducted in Texas. The state started its R&D tax credit program in 2014, and it’s currently set to expire in late 2026.
How To Claim Texas’ R&D Credits
In order to claim the state tax credits, businesses must register with the Texas Comptroller’s office either online or by filing Form AP-234, Texas Registration for Qualified Research and Development Sales Tax Exemption.
After registering, the comptroller’s office will issue a Texas Qualified Research Registration Number to use for completing Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate, to claim the sales tax exemption.
To apply for the franchise tax credit, taxpayers will need to file a Long Form Franchise Tax Report (05-158-A and 05-158-B) with Credits Summary Schedule (05-160) and 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 relies on the IRS’ definition of qualified research and expenses. Those definitions can be found in Internal Revenue Code (IRC) Section 41(d) and Section 174. All research conducted must follow these guidelines:
- Research must be undertaken for discovering information that is technological in nature.
- 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.
The categories the IRS provides to describe what qualifies as expenses are:
- 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
How Much Can Businesses Claim in R&D Tax Credits in Texas?
Depending on the type of research performed, businesses can claim 5% of the difference between the qualified research expenses incurred during the tax year and 50% of the average amount of qualified research expenses incurred during the three tax periods immediately preceding the period on which the tax report is based.
If the business has no qualified research expenses in one or more of the three tax periods before the period on which the tax report is based, it can claim 2.5% in tax credits for the expenses incurred during that period.
Businesses that perform the qualified research in contract with one or more public or private institutions of higher education can claim 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 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.
Frequently Asked Questions About R&D Tax Credits
What can you recover with R&D tax credits?
The R&D tax credits you can recover can be broken down into two parts — federal and state. The Federal portion is approximately 10% of eligible expenditures that can be used to offset Social Security taxes up to $250,000 per year, income taxes, or the alternative minimum tax (AMT). However, the state portion is different from state to state.
What are the benefits of R&D tax credits?
R&D tax credits can be used to offset the employer portion of Social Security taxes up to $250,000 for each fiscal year.
The Social Security tax offset allows qualified small businesses to receive a benefit for their research activities regardless of profitability. R&D tax credits can also be used to offset income taxes if you’re in a taxable position, which is dependent on your previous tax return statements.
R&D tax credits can also be used to offset the ??alternative minimum tax (AMT) if you have less than $50 million in average revenue for the three previous years and you owe AMT in the current year.
How do you prepare the documents for R&D tax credits?
Although the R&D Tax Credit program can help your business recover large amounts of your research and development spend, claiming the tax credits is a complicated process. You’ll need to provide evidence in the form of receipts and invoices for QREs.
The IRS and state revenue collection agencies have their own requirements, but many follow the federal guidelines for their state’s credits. Requirements for documentation include:
- Documents need to be contemporaneous, meaning the R&D expense needs to be documented as it occurs. The bigger the claim, the more documents you’ll need to collect.
- There needs to be proof the work occurred in the fiscal year being claimed. All documents supporting the QREs need to be dated.
- Your claim needs to highlight technical challenges and substantiate the R&D work that was done. The challenges should reflect one of the four broad categories (as defined by the IRS) that qualify as R&D work.
Tax professionals with industry experience assure your claim for R&D tax credits is backed up well and offer a sufficient explanation of R&D activities should the IRS audit your organization.
Boast Finds the Credits for You — With No Upfront Fee
Boast combines AI-driven software that finds opportunities for credits with the professional touch of our in-house R&D and SR&ED tax experts. We’ll work to get your business larger returns faster with less work.
Our staff is made up of engineers and finance professionals backed by over 20 years of experience in the field. We stay engaged with your business throughout the year to help you identify R&D-eligible work, which enables us to provide information on other technology grants and financing opportunities.
And if the IRS reviews your R&D claim, we’ll defend you in the process and help to ensure your claim is successful. Get in touch with us now to request a free assessment and get started on your next R&D claim.