| (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 (l) 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) Business component--A business component is any
product, process, computer software, technique, formula, or invention,
which is to be held for sale, lease, or license, or used by the taxable
entity in a trade or business of the taxable entity.
(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
(Combined Reporting; Affiliated Group Engaged in Unitary Business).
(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) Four-Part Test--The test described in IRC, §41(d)
(Qualified research defined) that determines whether research activities
are qualified research. The four parts of the test are the Section
174 Test, the Discovering Technological Information Test, the Business
Component Test, and the Process of Experimentation Test.
(5) Internal Revenue Code (IRC)--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.
A regulation adopted after December 31, 2011 is only included in this
term to the extent that a taxable entity could have applied the regulation
to the 2011 federal income tax year. Examples of treasury regulations
included in this definition are:
(A) Treasury Regulation, §1.174-2 (Definition
of research and experimental expenditures) as contained in 26 CFR
part 1 (revised as of July 21, 2014);
(B) Treasury Regulation, §1.41-4 (Qualified research
for expenditures paid or incurred in taxable years ending on or after
December 31, 2003) as contained in 26 CFR part 1 (revised as of November
3, 2016), except for paragraph (c)(6) (Internal use software). For
paragraph (c)(6), as provided in the last sentence of Treasury Regulation, §1.41-4
(e) (Effective/applicability dates), taxable entities may elect to
follow either of the following versions of paragraph (c)(6):
(i) Treasury Regulation, §1.41-4(c)(6) (Internal-use
computer software) as contained in 26 CFR part 1 (revised as of April
1, 2003) and IRB 2001-5; or
(ii) Proposed Treasury Regulation, §1.41-4(c)(6)
(Internal use software for taxable years beginning on or after the
December 31, 1985) as contained in IRB 2002-4.
(6) Public or private institution of higher education--
(A) an institution of higher education, as defined
by Education Code, §61.003 (Definitions); or
(B) a private or independent institution of higher
education, as defined by Education Code, §61.003.
(7) Qualified research--This term has the meaning given
in IRC, §41(d), except that the research must be conducted in
Texas. Qualified research activities must satisfy each part of the
Four-Part Test.
(8) Qualified research expense--This term has the meaning
given in IRC, §41(b) (Qualified research expenses), except that
the expense must be for qualified research conducted in Texas. IRC, §41(b)
defines qualified research expenses as the sum of in-house research
expenses and contract research expenses.
(A) In-house research expenses include any wages paid
or incurred for qualified services performed by an employee; any amount
paid or incurred for supplies used in the conduct of qualified research;
and any amount paid or incurred to another person for the right to
use computers in the conduct of qualified research.
(i) Qualified services include an employee either engaging
in qualified research or engaging in the direct supervision or direct
support of qualified research.
(I) For the purposes of this clause, the term "engaging
in qualified research" means the actual conduct of qualified research.
For example, a scientist conducting laboratory experiments could be
engaging in qualified research.
(II) For the purposes of this clause, the term "direct
supervision" means the immediate supervision (first-line management)
of qualified research. For example, a research scientist who directly
supervises laboratory experiments, but who may not actually perform
experiments, could be directly supervising qualified research. "Direct
supervision" does not include supervision by a higher-level manager
to whom first-line managers report, even if that manager is a qualified
research scientist.
(III) For the purposes of this clause, the term "direct
support" means services in the direct support of either: Persons engaging
in actual conduct of qualified research, or persons who are directly
supervising persons engaging in the actual conduct of qualified research.
(-a-) Direct support of research includes, but is not
limited to, the services of: a secretary for typing reports describing
laboratory results derived from qualified research; a laboratory worker
for cleaning equipment used in qualified research; a clerk for compiling
research data; and a machinist for machining a part of an experimental
model used in qualified research.
(-b-) Direct support of research activities does not
include general administrative services, or other services only indirectly
of benefit to research activities. For example, services of: payroll
personnel in preparing salary checks of laboratory scientists; an
accountant for accounting for research expenses; a janitor for general
cleaning of a research laboratory; or officers engaged in supervising
financial or personnel matters do not qualify as direct support of
research. This is true whether general administrative personnel are
part of the research department or in a separate department.
(-c-) Direct support does not include supervision.
Supervisory services constitute "qualified services" only to the extent
provided in subclause (II) of this clause.
(ii) Supplies are any tangible property other than
land, improvements to land, or property of a character subject to
the allowance for depreciation.
(iii) If a taxable entity claimed a sales or use tax
exemption under Tax Code, Chapter 151 (Limited Sales, Excise, and
Use Tax) when it purchased a taxable item, and that exemption is for
a use other than use in qualified research, the item is excluded from
being an in-house research expense, even if it otherwise meets the
definition of supplies in clause (ii) of this subparagraph. Exemptions
or exclusions that are not based on the use of an item do not result
in an exclusion from being an in-house research expense under this
clause.
(I) For example:
(-a-) An item for which a taxable entity claimed the
manufacturing exemption under Tax Code, §151.318 (Property Used
in Manufacturing) or the sale for resale exemption under Tax Code, §151.302
(Sales for Resale) is excluded from being an in-house research expense
under this clause.
(-b-) Water, sulphur, and items for which a taxable
entity paid sales or use tax to another state are not subject to sales
or use tax under Tax Code, §151.315 (Water), Tax Code, §151.3171
(Sulphur), and Tax Code, §151.303 (Previously Taxed Items: Use
Tax Exemption or Credit), but are not excluded from being an in-house
research expense under this clause.
(II) If an item is excluded from being an in-house
research expense under this clause, and the taxable entity used that
item in qualified research activities rather than the use for which
the sales or use tax exemption was granted, the taxable entity may
pay any sales or use tax, and any applicable penalty or interest,
related to the purchase or use of the item. Once the applicable sales
or use tax, penalty, and interest is paid, the taxable entity may
include the cost of that item as an in-house research expense.
(iv) The term wages has the meaning given such term
by IRC, §3401(a) (Wages). In the case of an employee within the
meaning of IRC, §401(c)(1) (Self-employed individual treated
as employee) the term wages includes the earned income as defined
in IRC, §401(c)(2) (Earned income) of such employee. The term
wages does not include any amount taken into account in determining
the work opportunity credit under IRC, §51(a) (Determination
of amount).
(v) If an employee performed both qualified services
and nonqualified services, only wages for qualified services constitute
an in-house research expense. Unless the taxable entity can demonstrate
another method is more appropriate, the amount of wages that are in-house
research expenses shall be determined by multiplying the total amount
of wages paid to or incurred for the employee during the report year
by the ratio of the total time actually spent by the employee in the
performance of qualified services for the taxable entity to the total
time spent by the employee in the performance of all services for
the taxable entity during the report year.
(vi) Notwithstanding clause (v) of this subparagraph,
if the ratio of the total time actually spent by an employee in the
performance of qualified services for the taxable entity to the total
time spent by the employee in the performance of all services for
the taxable entity during the report year is greater than 80%, all
services performed by that employee are considered qualified services.
(B) Contract research expenses are 65% of any amount
paid or incurred by the taxable entity to any person, other than an
employee of the taxable entity, for qualified research. If a taxable
entity satisfies the requirements of IRC, §41(b)(3)(C) (Amounts
paid to certain research consortia) or IRC, §41(b)(3)(D) (Amounts
paid to eligible small businesses, universities, and Federal laboratories)
the percentage of allowable contract research expenses is increased
as provided by those subparagraphs.
(i) An expense is paid or incurred for qualified research
only to the extent that it is paid or incurred pursuant to an agreement
that:
(I) is entered into prior to the performance of the
qualified research;
(II) provides that research be performed on behalf
of the taxable entity; and
(III) requires the taxable entity to bear the expense
even if the research is not successful.
(ii) If an expense is paid or incurred by the taxable
entity pursuant to an agreement under which payment is contingent
on the success of the research, then the expense is not a contract
research expense because the expense is considered paid for the product
or result of the research rather than the performance of the research.
This clause only applies to that portion of a payment that is contingent
on the success of the research.
(iii) Qualified research is performed on behalf of
the taxable entity if the taxable entity has a right to the research
results, even if that right is not exclusive.
(iv) If any contract research expenses are paid or
incurred during one report year for qualified research that is conducted
in a subsequent report year, the expenses shall be treated as paid
or incurred during the report year in which the qualified research
is conducted.
(v) See IRC, §41(b) for special circumstances
that change the percentage that applies to contract research expenses.
(9) Registration Number--The Texas Qualified Research
Registration Number issued by the comptroller to a person who submits
the Texas Registration for Qualified Research and Development Sales
Tax Exemption form.
(10) Research and development activities credit (credit)--A
credit against franchise tax for qualified research expenses that
is allowed under Tax Code, Chapter 171, Subchapter M (Tax Credit for
Certain Research and Development Activities).
(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) Application of the Four-Part Test. Research activities
must satisfy each part of the Four-Part Test, as described in paragraph
(1) of this subsection, to be qualified research.
(1) Four-Part Test.
Cont'd... |
