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Research & development credits—Texas considerations
Credits & Incentives talk with Deloitte
"Credits & Incentives talk with Deloitte" is a monthly column by Kevin Potter of Deloitte Tax LLP, featured in the Journal of Multistate Taxation and Incentives, a Thomson Reuters publication. This edition explores Texas’ research and development credits with a focus on sales/use tax exemptions and franchise tax credits.
Research and development (R&D) is an important activity that continues to propel the United States forward into the 21st century. In 2014, it was projected that the United States would invest $465 billion in R&D, relative to the estimated $1.6 trillion invested in R&D globally during the year.1 The US has continued to be the largest investor in R&D, though the gap has narrowed relative to certain countries such as China.
At the federal level, a nonrefundable income tax credit is available for a company making significant investments in R&D. Approximately 45 states also offer state-level R&D tax credits, including a few states where the R&D credit may be refundable.2
The Protecting Americans from Tax Hikes Act (PATH)3 signed by President Obama on December 18, 2015, made the federal R&D credit permanent. For tax years commencing on or after January 1, 2016, the R&D credit is modified to allow an eligible small business (as defined in section 38(c)(5)(C)) to claim the R&D credit against both its regular tax and alternative minimum tax (AMT) liabilities.4 Also, for tax years commencing on or after January 1, 2016, certain small businesses may claim the R&D credit against the employer portion of their payroll tax liability, rather than against their income tax liability.5
If a primary goal of the federal R&D credit is to encourage companies to conduct R&D activity in the US, individual states, hoping to attract companies along with the high-wage, technically skilled jobs associated with the conduct of R&D, are similarly motivated. Competition for companies conducting R&D activity is fierce, and state-level R&D tax credits are one component in a state's economic development plan to encourage companies to consider conducting such activity in the state. In many states, the computation of the R&D tax credit is modelled on the federal credit methodology to avoid the administrative burden on both taxpayers and the state taxing authority that potentially arises from application of an entirely different calculation.
Texas has been aggressive in its support of economic growth through economic development programs such as the Texas Enterprise Zone Program, Renewable Energy Incentives, Skills Development Fund, and the Texas Enterprise Fund. On June 14, 2013, Texas Governor Rick Perry signed House Bill 500 (H.B. 500) and House Bill 800 (H.B. 800) which expanded the incentives available for companies conducting R&D activity in Texas through the creation of an electable sales/use tax exemption or franchise tax credit.
For a complete list of references, download the PDF.