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(ii)A taxable entity does not retain substantial rights
in the research it performs if the taxable entity must pay for the
right to use the results of the research.
(C)If a taxable entity performing research does not
retain substantial rights to the results of the research, the research
is considered funded regardless of whether the payments to the researcher
are contingent upon the success of the research. In this case, all
research activities are considered funded even if the researcher has
expenses that exceed the amount received by the researcher for the
research.
(D)If a taxable entity performing research does retain
substantial rights to the results of the research and the research
is considered funded under subparagraph (A)(ii) of this paragraph,
the research is only funded to the extent of the payments and fair
market value of any property that the taxable entity becomes entitled
to by performing the research. If the expenses related to the research
exceed the amount the researcher is entitled to receive, the research
is not considered funded with respect to the excess expenses. For
example, a taxable entity performs research for another person. Based
on the contract, the research activities are considered funded under
subparagraph (A)(ii) of this paragraph because payments to the researcher
are not contingent on the success of the research. The taxable entity
retains substantial rights to the results of the research. The taxable
entity is entitled to $100,000 under the contract but spent $120,000
on the research activities. In this case, the research is considered
funded with respect to $100,000 and is not considered funded with
respect to $20,000.
(E)A taxable entity performing research for another
person must identify any other person paying for the research activities
and any person with substantial rights to the results of the research.
(F)All agreements, not only research contracts, entered
into between the taxable entity performing the research and the party
funding the research shall be considered in determining the extent
to which the research is funded.
(G)The provisions of this paragraph shall be applied
separately to each research project undertaken by the taxable entity.
(e)Eligibility for credit.
(1)A taxable entity is eligible to claim a 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.
(2)A taxable entity has the burden of establishing
its entitlement to, and the value of, the credit by clear and convincing
evidence, including proof that the research activities meet the definition
of qualified research, the amount of any qualified research expenses,
and applying the shrink-back rule described in subsection (c)(3) of
this section.
(A)All qualified research expenses must be paid or
incurred in connection with research activities that are qualified
research.
(B)All qualified research expenses must be supported
by contemporaneous business records.
(i)Contemporaneous business records for wages are
records that were created and maintained during the period in which
the taxable entity paid the employee to engage in qualified services.
This includes, but is not limited to, payroll records, employee job
descriptions, performance evaluations, calendars, and appointment
books.
(ii)Contemporaneous business records for supplies
are records that were created and maintained during the period in
which the supplies were purchased. This includes, but is not limited
to, inventory records, invoices, purchase orders, and contracts.
(iii)Contemporaneous business records for contract
research expenses are records that were created and maintained during
the period in which the contract research expenses were paid or incurred.
This includes, but is not limited to, contracts and invoices.
(3)An Internal Revenue Service audit determination
of eligibility for the federal research and development credit under
IRC, §41 (Credit for increasing research activities), whether
that determination is that the taxable entity qualifies or does not
qualify for the federal research and development credit, is not binding
on the comptroller's determination of eligibility for the credit.
(f)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
(Certain Property Used in Research and Development Activities; Reporting
of Estimates and Evaluation) during that period.
(2)A taxable entity that is not eligible to claim
a credit under this subsection may carry forward an unused credit
under subsection (l) of this section.
(g)Amount of credit.
(1)Qualified research expenses in Texas. Subject to
subsection (h) 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)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.
(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 (h) 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 Texas 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. The comptroller may verify the qualified research
expenses used to compute the prior year average, even if the statute
of limitations for the prior year has expired. This verification will
not result in an adjustment to tax, penalty, or interest for any report
year for which the statute of limitations is closed.
(6)A taxable entity with any qualified research expenses
under higher education contracts in a tax period may include all of
its qualified research expenses in the calculations under paragraphs
(3) and (4) of this subsection, even if not all of the qualified research
expenses are related to higher education contracts. For taxable entities
in a combined group, see subsection (i) of this section.
(h)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 (f) 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.
(i)Combined reporting.
(1)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.
(2)The combined group is the taxable entity for purposes
of this section. The total qualified research expenses of each member
of the combined group shall be added together to determine the total
credit claimed on the combined report.
(3)If there is a change in membership of the combined
group, the resulting combined group is a new taxable entity and the
resulting combined group is not entitled to the carryforward of the
credit under subsection (l) of this section because it is no longer
the same taxable entity as the taxable entity that established the
credit carryforward. For the purposes of this section, there is no
change in membership of the combined group if:
(A)the common owner or owners of the members of the
combined group changes without any change in the members of the combined
group;
(B)the common owner or owners change without any change
in the members of the combined group other than the addition of a
newly-formed entity that is the new common owner;
(C)the combined group undergoes a corporate reorganization
that does not result in any member entities leaving the combined group;
(D)two or more members of the combined group merge;
(E)one or more members of the combined group forms
a new entity that is a member of the combined group; or
(F)one or more members of the combined group is terminated,
dissolved, or otherwise loses its status as a legal entity.
(4)A combined group with any qualified research expenses
under higher education contracts in a tax period may include all of
its qualified research expenses in the calculations under subsection
(g)(3) and (4) of this section, even if not all of the members of
the combined group have qualified research expenses that are related
to higher education contracts.
(j)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 (Reporting for Certain Partnerships
in Tiered Partnership Arrangement) 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.
(k)Limitation. The total credit claimed under this
section for a report, including the amount of any carryforward credit
under subsection (l) of this section, may not exceed 50% of the amount
of franchise tax due for the report before any other applicable tax
credits.
(l)Carryforward.
(1)If a taxable entity is eligible for a credit that
exceeds the limitation under subsection (k) of this section, the taxable
entity may carry the unused credit forward for not more than 20 consecutive
reports.
(2)Research and development 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 (Tax Credit
for Certain Research and Development Activities), 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.
(3)If a taxable entity claims a carryforward on a
report within the statute of limitations, the comptroller may verify
that the credit that established the carryforward was based on qualified
research activities, even if the statute of limitations for the year
in which the credit was created has expired. This verification will
not result in an adjustment to tax, penalty, or interest for any report
year for which the statute of limitations has expired. The verification
may result in an adjustment to the carryforward for all periods within
the unexpired statute of limitations and for all future periods in
which the taxable entity may claim the carryforward.
(4)For application of the carryforward to combined
groups, see subsection (i)(3) of this section.
(m)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.
(n)Application for credit.
(1)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. 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.
(2)The comptroller may require a taxable entity that
claims a credit under this section to provide all data and information
required for the comptroller to evaluate the credit and to comply
with Tax Code, §151.3182(c).
(o)Amending reports.
Cont'd...
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