(3)Duplication of existing business component. Any
research related to the reproduction of an existing business component,
in whole or in part, from a physical examination of the business component
itself or from plans, blueprints, detailed specifications, or publicly
available information with respect to such business component. This
exclusion does not apply merely because the taxable entity examines
an existing business component in the course of developing its own
business component.
(4)Surveys, studies, etc. Any efficiency survey; activity
relating to management function or technique; market research, testing
or development (including advertising or promotions); routine data
collection; or routine or ordinary testing or inspection for quality
control.
(5)Computer software. Any research activities with
respect to internal use software.
(A)For the purposes of this paragraph, internal use
software is computer software developed by, or for the benefit of,
the taxable entity primarily for internal use by the taxable entity.
A taxable entity uses software internally if the software was developed
for use in the operation of the business. Computer software that is
developed to be commercially sold, leased, licensed, or otherwise
marketed for separately stated consideration to unrelated third parties
is not internal use software.
(B)Software developed by a taxable entity primarily
for internal use by an entity that is part of an affiliated group
to which the taxable entity also belongs shall be considered internal
use software for purposes of this paragraph.
(C)This exclusion does not apply to software used
in:
(i)an activity that constitutes qualified research,
or
(ii)a production process that meets the requirements
of the Four-Part Test.
(D)The determination as to whether software is internal
use software depends on the facts and circumstances existing at the
beginning of the development of the software.
(6)Social sciences, etc. Any research in the social
sciences, arts, or humanities.
(7)Funded research. Any research funded by any grant,
contract, or otherwise by another person or governmental entity.
(A)Research is considered funded if:
(i)the taxable entity performing the research for
another person retains no substantial rights to the results of the
research; or
(ii)the payments to the researcher are not contingent
upon the success of the research.
(B)For the purposes of determining whether a taxable
entity retains substantial rights to the results of the research:
(i)Incidental benefits to the researcher from the
performance of the research do not constitute substantial rights.
For example, increased experience in a field of research is not considered
substantial rights.
(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)[(c)] Eligibility for credit.
(1)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.
(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)[(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 taxable entity's 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. [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.]
(g)[(e)] Amount of credit.
(1)Qualified research expenses in Texas. Subject to
subsection (h) [(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)all [the] 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) [(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 Texas [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. 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)[(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 (f) [(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.
(i)[(g)] 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[
(Combined Reporting; Affiliated Group Engaged in Unitary Business)].
(2)Each member of a combined group
determines its credit under this section as if it were an individual
taxable entity. The total credits of each member of the combined group
shall be added together to determine the total credit claimed on the
combined report.
(3)Each member of a combined group
is entitled to that portion of the carryforward of the credit under
subsection (l) of this section in proportion to the amount of the
credit created by each member's qualified research. Each member of
a combined group remains entitled to its portion of the carryforward
even if the member changes combined groups for any reason.
(4)The higher education rate described
by subsection (g)(3) and (4) of this section applies to each member
of a combined group separately and not to the combined group as a
whole.
(5)The combined group is the taxable entity
for purposes of claiming the credit. Eligibility for and the
amount of the credit is determined by each member as if it were an
individual taxable entity [this section].
(j)[(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.
Cont'd...
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