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R&D Tax Credit Returns to Texas
New credit revitalizes former state franchise tax credit for R&D activities.
The Legislature hopes that the reintroduction of the state R&D tax credit will:
1. make Texas economically competitive in the field of research and development;
2. reduce the tax burden on research and development activities in Texas and encourage new investments in this state;
3. promote the creation of new, highly skilled, high-paying jobs in Texas; and
4. complement this state's manufacturing industries by encouraging innovation and efficiency in applying new technologies and producing new products.
A memorandum from the Texas Legislative Budget Board released on January 22, 2013 pointed out that Texas spent the third highest amount of any state on R&D in 2008 (approximately $20.3 billion dollars.) Still, Texas ranked only 28th in R&D spending when compared to gross state product ($1.196 trillion dollars in 2008.) This means, despite the economic prosperity of the state, Texas still has room for growth in R&D spending. The Legislature intends to improve upon these statistics through the passage of the new Texas R&D tax credit. Paradigm Partners’ Executive Vice President of Business Development, Brian Cameron said, “Texas is the center of many American industries, not least of which, is the oil and gas business. This credit will encourage companies to hire more skilled workers, train more employees, and pay better salaries while keeping Texas competitive and innovative in the worldwide market.”
Similar to the federal R&D tax credit’s Alternative Simplified Credit calculation, the new Texas R&D tax credit compares the difference between the qualified research expenditures (QREs) incurred during the current tax year and 50% of the average amount of QREs incurred during the prior three tax years. For most companies engaged in R&D, this difference will then be multiplied by 5% for the Texas credit. Companies that contract with public or private institutions of higher education will be able to increase that percentage to 6.25%. For companies that do not have QREs in one or more of the prior three tax years, this percentage will be reduced to 2.5% (3.125% if the company contracts with educational institutions)
Also similar to federal rules, the credit may be carried forward up to twenty years. Unlike the federal credit, the new Texas incentive cannot be carried back. Additionally, any companies still carrying forward credits calculated under the former R&D incentive (approximately $14.7 million was still being carried forward by Texas companies in 2011) must utilize them before claiming any new carry-forwards or current year credits. Karim Solanji, Director at Paradigm Partners, explained, “Companies who still have carry-forwards will not be adversely affected by the new credit. This new incentive is a continuation of the Legislature’
With a sunset date of December 31, 2026 and no imposed funding cap, Texas businesses can count on a consistent incentive to invest in its workforce, processes, and technology. Until this point, Texas has had one of the highest effective tax rates for new companies engaged in R&D (ranked 43rd in the nation) and capital investments (ranked 20th in the nation). This credit will substantially decrease the burden on companies seeking to grow and thrive in Texas. Additionally, the economic development driven by this credit will attract new, innovative companies to a state that is already the “number one place in the nation to do business.”