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:
- The purpose of the research is to attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.
- You are experimenting and evaluating possible alternatives (via testing, modeling, simulating, trial and error, etc.)
- The experimentation is technological in nature and backed by hard science.
- 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.