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TITLE 34PUBLIC FINANCE
PART 1COMPTROLLER OF PUBLIC ACCOUNTS
CHAPTER 3TAX ADMINISTRATION
SUBCHAPTER VFRANCHISE TAX
RULE §3.599Margin: Research and Development Activities Credit

(a) Effective dates.

  (1) The provisions of this section apply to franchise tax reports originally due on or after January 1, 2014.

  (2) These provisions expire on December 31, 2026. The credits allowed under this section cannot be established on a report originally due after December 31, 2026. The expiration does not affect the carryforward of a credit authorized under these provisions as provided in subsection (j) of this section and established on a report originally due prior to the expiration date of these provisions.

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

  (1) Affiliated group--Entities in which a controlling interest is owned by a common owner, either corporate or noncorporate, or by one or more of the member entities.

  (2) Combined group--Taxable entities that are part of an affiliated group engaged in a unitary business and that are required to file a combined group report under Tax Code, §171.1014.

  (3) Controlling interest--

    (A) For a corporation, either more than 50%, owned directly or indirectly, of the total combined voting power of all classes of stock of the corporation, or more than 50% owned directly or indirectly, of the beneficial ownership interest in the voting stock of the corporation.

    (B) For a partnership, association, trust, or other entity other than a limited liability company, more than 50%, owned directly or indirectly, of the capital, profits, or beneficial interest in the partnership, association, trust, or other entity.

    (C) For a limited liability company, either more than 50%, owned directly or indirectly, of the total membership interest of the limited liability company or more than 50%, owned directly or indirectly, of the beneficial ownership interest in the membership interest of the limited liability company.

  (4) Internal Revenue Code--The Internal Revenue Code of 1986 in effect on December 31, 2011, excluding any changes made by federal law after that date, but including any regulations that are later adopted under that code applicable to the tax year to which the provisions of the code in effect on that date applied.

  (5) Public or private institution of higher education--

    (A) an institution of higher education, as defined by Education Code, §61.003; or

    (B) a private or independent institution of higher education, as defined by Education Code, §61.003.

  (6) Qualified research--This term has the meaning given in Internal Revenue Code, §41(d), except that the research must be conducted in Texas.

  (7) Qualified research expense--This term has the meaning given in Internal Revenue Code, §41(b), except that the expense must be for qualified research conducted in Texas.

  (8) Registration Number--The number issued by the comptroller to a person who submits the Texas Registration for Qualified Research and Development Sales Tax Exemption form.

  (9) Research and development activities credit--A credit against franchise tax for qualified research expenses that is allowed under Tax Code, Chapter 171, Subchapter M.

  (10) Research and development credit--A credit against franchise tax for research and development expenses allowed under Tax Code, Chapter 171, Subchapter O, and established on a franchise tax report originally due prior to January 1, 2008.

  (11) Tax period--The period on which a franchise tax report is based as provided by §3.584(c) of this title (relating to Margin: Reports and Payments).

(c) Eligibility for credit. A taxable entity is eligible to claim a research and development activities credit for the periods in which the taxable entity is engaged in qualified research and incurs qualified research expenses. The credit may be claimed on a franchise tax report for qualified research expenses incurred during the period on which the report is based.

(d) Ineligibility for credit.

  (1) A taxable entity is not eligible to claim a credit on a franchise tax report for qualified research expenses incurred during the period on which the report is based if the taxable entity, or a member of the combined group, if the taxable entity is a combined group, received an exemption from sales and use tax under Tax Code, §151.3182 during that period.

  (2) A taxable entity's ineligibility under this subsection does not affect the taxable entity's eligibility to claim a carryforward of unused credit under subsection (j) of this section.

(e) Amount of credit.

  (1) Qualified research expenses in Texas. Subject to subsection (f) of this section, and except as provided by paragraphs (2), (3), and (4) of this subsection, the credit allowed for any report equals 5.0% of the difference between:

    (A) the qualified research expenses incurred during the period on which the report is based; and

    (B) 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based.

  (2) Entities without qualified research expenses in each of the three preceding tax periods. Except as provided by paragraph (4) of this subsection, if the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 2.5% of the qualified research expenses incurred during that period.

  (3) Qualified research expenses under a higher education contract. Subject to subsection (f) of this section, and except as provided by paragraph (4) of this subsection, if the taxable entity contracts with one or more public or private institutions of higher education for the performance of qualified research and the taxable entity incurs qualified research expenses in this state under the contract during the period on which the report is based, then the credit for the report equals 6.25% of the difference between:

    (A) all qualified research expenses incurred during the period on which the report is based; and

    (B) 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.

  (4) Entities with qualified research expenses under higher education contracts but without qualified research expenses in each of the three preceding tax periods. If the taxable entity incurs qualified research expenses in Texas under a contract with one or more public or private institutions of higher education for the performance of qualified research during the period on which the report is based, but the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, then the credit for the period on which the report is based equals 3.125% of all qualified research expenses incurred during that period.

  (5) Same method of computing qualified research expenses required. Notwithstanding whether the statute of limitations for claiming a credit under this section has expired for any tax period used in determining the average amount of qualified research expenses under paragraph (1)(B) or (3)(B) of this subsection, the determination of which research expenses are qualified research expenses for purposes of computing that average must be made in the same manner as that determination is made for purposes of paragraph (1)(A) or (3)(A) of this subsection.

(f) Attribution of expenses following transfer of controlling interest.

  (1) If a taxable entity acquires a controlling interest in another taxable entity, or in a separate unit of another taxable entity, during a tax period with respect to which the acquiring taxable entity claims a credit under this section, then the amount of the acquiring taxable entity's qualified research expenses equals the sum of:

    (A) the amount of qualified research expenses incurred by the acquiring taxable entity during the period on which the report is based; and

    (B) subject to paragraph (4) of this subsection, the amount of qualified research expenses incurred by the acquired taxable entity or unit during the portion of the period on which the report is based that precedes the date of the acquisition.

  (2) A taxable entity that sells or otherwise transfers to another taxable entity a controlling interest in another taxable entity, or in a separate unit of a taxable entity, during a period on which a report is based may not claim a credit under this section for qualified research expenses incurred by the transferred taxable entity or unit during the period if:

    (A) the taxable entity that makes the sale or transfer is ineligible for the credit under subsection (d) of this section; or

    (B) the acquiring taxable entity claims a credit under this section for the corresponding period.

  (3) If during any of the three tax periods following the period in which a sale or other transfer described by paragraph (2) of this subsection occurs, the taxable entity that sold or otherwise transferred the controlling interest reimburses the acquiring taxable entity for research activities conducted on behalf of the taxable entity that made the sale or other transfer, the amount of the reimbursement is:

    (A) included as qualified research expenses incurred by the taxable entity that made the sale or other transfer for the tax period during which the reimbursement was paid, subject to paragraph (5) of this subsection; and

    (B) excluded from the qualified research expenses incurred by the acquiring taxable entity for the tax period during which the reimbursement was paid.

  (4) An acquiring taxable entity may not include on a report the amount of qualified research expenses otherwise authorized by paragraph (1)(B) of this subsection if the taxable entity that made the sale or other transfer described by paragraph (2) of this subsection received an exemption under Tax Code, §151.3182 during the portion of the period on which the acquiring taxable entity's report is based that precedes the date of the acquisition.

  (5) A taxable entity that makes a sale or other transfer described by paragraph (2) of this subsection may not include on a report the amount of reimbursement otherwise authorized by paragraph (3)(A) of this subsection if the reimbursement is for research activities that occurred during a tax period in which the entity that makes a sale or other transfer received an exemption under Tax Code, §151.3182.

(g) Combined reporting. A credit under this section for qualified research expenses incurred by a member of a combined group must be claimed on the combined report for the group required by Tax Code, §171.1014 (Combined Reporting; Affiliated Group Engaged in Unitary Business). The combined group is the taxable entity for purposes of this section.

(h) Tiered partnership reporting.

  (1) An upper tier entity and a lower tier entity may claim a credit under this section for qualified research expenses; however, an upper tier entity and a lower tier entity cannot claim a credit under this section for the same qualified research expense.

  (2) An upper tier entity that includes the total revenue of a lower tier entity for purposes of computing its taxable margin as authorized by Tax Code, §171.1015 may claim the credit under this section for qualified research expenses incurred by the lower tier entity to the extent of the upper tier entity's ownership interest in the lower tier entity.

(i) Limitation. The total credit claimed under this section for a report, including the amount of any carryforward credit under subsection (j) of this section, may not exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits.

(j) Carryforward.

  (1) If a taxable entity is eligible for a credit that exceeds the limitation under subsection (i) of this section, the taxable entity may carry the unused credit forward for not more than 20 consecutive reports.

  (2) Credits, including credit carryforwards, are considered to be used in the following order:

    (A) a credit carryforward of unused research and development credits accrued under Tax Code, Chapter 171, Subchapter O, before its repeal on January 1, 2008, and claimed as authorized by §3.593 of this title (relating to Margin: Franchise Tax Credits);

    (B) a credit carryforward under this section; and

    (C) a current year credit.

(k) Assignment prohibited. A taxable entity may not convey, assign, or transfer the credit allowed under this section to another entity unless all of the assets of the taxable entity are conveyed, assigned, or transferred in the same transaction.

(l) Application for credit.

  (1) A taxable entity must apply for a credit under this section. A taxable entity applies for the credit by claiming the credit on or with the franchise tax report for the period for which the credit is claimed. To apply for a credit, a taxable entity must also complete Form 05-178, Texas Franchise Tax Research and Development Activities Credits Schedule, its electronic equivalent, or any form promulgated by the comptroller that succeeds such form.

Cont'd...

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