| (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.
(A) Section 174 Test. Expenditures related to the research
must be eligible to be treated as expenses under IRC, §174 (Research
and experimental expenditures).
(i) Expenditures are eligible to be treated as expenses
under IRC, §174, if the expenditures are incurred in connection
with the taxable entity's trade or business and represent a research
and development cost in the experimental or laboratory sense. Expenditures
represent research and development costs in the experimental or laboratory
sense if they are for activities intended to discover information
that would eliminate uncertainty concerning the development or improvement
of a product. Uncertainty exists if the information available to the
taxable entity does not establish the capability or method for developing
or improving the product or the appropriate design of the product.
(ii) For the purposes of this test, the term "product"
includes any pilot model, process, formula, invention, technique,
patent, or similar property, and includes products to be used by the
taxable entity in its trade or business as well as products to be
held for sale, lease, or license.
(iii) Expenditures for the following are not eligible
to be treated as expenses under IRC, §174:
(I) land;
(II) depreciable property;
(III) the ordinary testing or inspection of materials
or products for quality control;
(IV) efficiency surveys;
(V) management studies;
(VI) consumer surveys;
(VII) advertising or promotions;
(VIII) the acquisition of another's patent, model,
production, or process; or
(IX) research in connection with literary, historical,
or similar projects.
(B) Discovering Technological Information Test. The
research must be undertaken for the purpose of discovering information
that is technological in nature.
(i) Research is undertaken for the purpose of discovering
technological information if it is intended to eliminate uncertainty
concerning the development or improvement of a business component.
Uncertainty exists if the information available to the taxable entity
does not establish the capability or method for developing or improving
the business component, or the appropriate design of the business
component.
(ii) In order to satisfy the requirement that the research
is technological in nature, the process of experimentation used to
discover information must fundamentally rely on principles of the
physical or biological sciences, engineering, or computer science.
A taxable entity may employ existing technologies and may rely on
existing principles of the physical or biological sciences, engineering,
or computer science to satisfy this requirement.
(iii) A determination that research is undertaken for
the purpose of discovering information that is technological in nature
does not require that the taxable entity:
(I) seek to obtain information that exceeds, expands,
or refines the common knowledge of skilled professionals in the particular
field of science or engineering in which the taxable entity is performing
the research; or
(II) succeed in developing a new or improved business
component.
(C) Business Component Test. The application of the
technological information for which the research is undertaken must
be intended to be useful in the development of a new or improved business
component of the taxable entity, which may include any product, process,
computer software, technique, formula, or invention that is to be
held for sale, lease, or license, or used by the taxable entity in
a trade or business of the taxable entity.
(i) If a taxable entity provides a service to a customer,
the service provided to that customer is not a business component
because a service is not a product, process, computer software, technique,
formula, or invention. However, a product, process, computer software,
technique, formula, or invention used by a taxable entity to provide
services to its customers may be a business component.
Cont'd... |
