Austin R&D Tax Credits

Staying ahead of your competitors requires innovation, and innovation requires research, trial, and error. Initially established in 1981, the research & development tax credit helps businesses of all kinds save money while they experiment and innovate—as long as they closely track and record all of their qualified research expenses (also known as QREs).


Federal research and development tax credits were made permanent thanks to 2015’s “Protecting Americans from Tax Hikes Act,” also referred to as the PATH Act. Other R & D credits vary from state to state.


R & D tax credits have been available in the state of Texas since 2014. Texas R & D credits may be applied one of two ways: as a Franchise Tax Credit, or as a Sales and Use Tax Exemption on the purchase, rental, storage, or lease of depreciable tangible personal property that is used in qualified research activities conducted in the state of Texas. You can only choose one method per year, and the right choice will depend on your unique financial situation.


At Haynie & Company, we have extensive experience calculating R & D tax credit for small businesses and large businesses across the nation. It’s our job to save you money and uncover every potential tax benefit you’re entitled to. Below you’ll find more information about R & D tax credits in Austin. To speak with our research and development credit specialists and find out if your business is eligible for this tax break, reach out to our Austin CPA firm ASAP.

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All About Texas Research & Development Tax Credit

  • Qualified Research Expenses (QREs) only apply to research that is conducted within the state of Texas.
  • The credit amount is equal to 5% of the excess amount of qualified research expenses in the current period over the base amount.
  • Any amount spent on colleges or universities will be able to generate a 25% higher Texas R&D tax credit.
  • R&D tax credits can be used to offset the employer portion of Social Security taxes up to $250,000 for each fiscal year.
  • 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.


To get the most out of your claim and reduce your tax bill, reach out to the R & D tax credit specialists at Haynie & Company CPA firm. We make it simple to save big!

Who Can Claim R & D Tax Credit in Texas?

C-corporation, S-corporations, LLCs, and partnerships are all potentially eligible for research and development tax credits.


Companies engaging in the following activities within the state of Texas can claim the credit:


  • Testing products
  • Employing engineers
  • Investing in data science and data analysis


Claiming the tax credits is a complicated process. You’ll need to provide evidence in the form of receipts and invoices for all qualified research expenses. In addition, all supporting documents need to be dated in order to prove that the work occurred during the fiscal year being claimed. If a business does not engage in hard science or appropriate recordkeeping but still tries to claim an R & D tax credit, they may be audited.


For help calculating and claiming your Austin R&D tax credits, contact the tax professionals at Haynie & Company.

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What Qualifies as R & D Expenses in Texas?

Things like wages, supplies, and contractors could count as research and development expenses. However, these have to be utilized in the appropriate manner in order to qualify.


According to the Internal Revenue Code (IRC) Section 41(d) and Section 174, all research conducted must meet the guidelines of the following 4-part test in order to qualify for the research and development tax credit: 


  1. The purpose of the research is to attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.
  2. You are experimenting and evaluating possible alternatives (via testing, modeling, simulating, trial and error, etc.)
  3. The experimentation is technological in nature and backed by hard science.
  4. You aim to eliminate uncertainty during these processes.


Additionally, all research must be conducted in Texas to qualify. To find out more about R & D tax credit funded research and see if you qualify for R & D tax credits in Texas this year, reach out now. 


Franchise Tax Credit Claim


Texas R & D credits for the current tax year apply to the Franchise Tax Report in the subsequent tax year. To apply for the franchise tax credit, you must file a Texas franchise tax report detailing your research and development activities in Texas. Specifically, these are the 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 forms can be submitted electronically via the Texas Comptroller’s portal.


Sales and Use Tax Exemption


Earlier, we mentioned how Texas R & D credits may be applied as a Sales and Use Tax Exemption for depreciable tangible personal property. “Depreciable tangible personal property” is defined as the following:


  • has a useful life of more than one year
  • is subject to depreciation


When it comes to federal income tax, a depreciation deduction is a reasonable allowance for the wear and tear of business-related property. However, for the purpose of the sales tax exemption, the depreciable item must be directly used in qualified research activities (QRAs).


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. You’ll need this number to fill out Form 01-931, Texas Qualified Research Sales and Use Tax Exemption Certificate and claim the sales tax exemption. You’ll present the certificate when purchasing qualifying items.


Additionally, in order to avoid cancellation of the registration, anyone claiming the sales tax exemption must file an Annual Information Report (AIR) with the Comptroller’s office before March 31st each calendar year. The report allows registrants to renew their registration number and report required information about the qualified research they performed in Texas, the number of employees engaged in research and development in Texas, and other data regarding sales tax revenue.


The Internal Use Software (IUS) Exclusion


Any software “sold, leased, licensed, or otherwise marketed for separately stated consideration to unrelated third parties” cannot be considered part of the qualified research expenditures. However, the internal use software (IUS) exclusion in Texas does not apply to software used for activities that constitute qualified research, or in any production process that meets the requirements of the aforementioned 4-part test. Recent 2022 amendments reverted the definition of Internal Use Software (IUS) to the pre-November 2016 federal definition. Now, the Texas Comptroller defines Internal Use Software as “computer software developed by, or for the benefit of, the taxable entity primarily for internal use by the taxable entity.” These amendments also affect prototypes.


What is the “Startup Provision?”


To offset the FICA portion of their annual payroll tax, startups in Austin could qualify for up to $1.25 million (or $250,000 each year for up to five years) in federal R & D tax credit. In order to be eligible, the start-up companies must not exceed the following:


  • $5 million in gross receipts for the credit year
  • 5 years of gross receipts


For Help with Payroll Taxes, R & D Tax Credits, and More, Contact Haynie & Company CPA Firm in Austin, TX


Fewer than one third of companies that qualify for R & D credits actually apply for them. As an Austin business owner, it’s important to stay informed about state and federal income tax liability so you don’t miss out on opportunities like these!


Did you know unused tax credits for research and development can be carried forward up to 20 years? Even if you’ve missed out in prior tax years, the team of professionals at Haynie & Company can help you collect the money you deserve.


With audit defense, income tax preparation, financial planning, and more, Haynie & Company is the Austin CPA firm you can trust. Decades of experience and a deep understanding of internal revenue code and tax liability empower us to uncover every possible tax credit for our clients.


Here’s how we can assist you in applying for R&D tax credit:


  • Identifying qualifying R&D activities
  • Closely tracking qualified expenses
  • Documenting related costs
  • Organizing gross receipts
  • Meeting important deadlines
  • Preparing any required tax filings, including how to file Form 6765
  • Federal audit support/Texas state audit support 
  • Performing look-back studies to find unclaimed credits for open tax years


To find out if you qualify for R&D tax credits in Texas, contact Haynie & Company’s dedicated tax professionals today.