The Comptroller of Public Accounts adopts new §3.599, concerning margin: research and development activities credit, without changes to the proposed text as published in the January 30, 2015, issue of the Texas Register (40 TexReg 430). This section implements House Bill 800, 83rd Legislature, 2013, which added Tax Code, Chapter 171, Subchapter M (Tax Credit for Certain Research and Development Activities) to create a credit against franchise tax for the expenses incurred in conducting certain research and development activities.

Subsection (a) provides the effective dates of the provisions in this section, as enacted by House Bill 800, 83rd Legislature, 2013. Paragraph (2) clarifies that a credit cannot be established on a report originally due after the expiration date set out in Tax Code, §171.665 (Expiration).

Subsection (b) provides definitions. The definitions in paragraphs (1), (2), and (3) for the terms "affiliated group," "combined group," and "controlling interest" are taken directly from Tax Code, §171.0001. The definitions in paragraphs (4) and (5) for the terms "Internal Revenue Code" and "public or private institution of higher education" are taken directly from Tax Code, §171.651(1) and (2) (Definitions). The definition in paragraph (6) of the term "qualified research" is taken from Internal Revenue Code, §41(d). The definition in paragraph (7) of the term "qualified research expense" is taken from Internal Revenue Code, §41(b). The definition in paragraph (8) of the term "Registration Number" is taken directly from §3.340 of this title (relating to Qualified Research). The definitions in paragraphs (9) and (10) of the terms "research and development activities credit" and "research and development credit" distinguish between the credit allowed by Tax Code, Chapter 171, Subchapter M and the credit previously allowed by Tax Code, Chapter 171, Subchapter O, (Tax Credit for Certain Research and Development Activities (Repealed)) respectively. The definition in paragraph (11) for "tax period" is based on the periods specified in §3.584(c) of this title (relating to Margin: Reports and Payments).

Subsection (c) explains the scope of the franchise tax credit for qualified research. The language of this subsection is based on Tax Code, §171.652, which states that a taxable entity is eligible to claim on a franchise tax report the research and development activities credit for qualified research expenses incurred during the period on which the report is based.

Subsection (d) explains that a taxable entity is not eligible to claim the research and development activities credit on a report if the entity claimed a sales tax exemption or if a member of a combined group, if the taxable entity is a combined group, claimed a sales tax exemption for the period on which the franchise tax report is based. This subsection implements Tax Code, §171.653 (Ineligibility for Credit for Certain Periods).

Subsection (e) provides the general method for calculating the amount of the credit as well as the methods for calculating the amount of credit when there are qualified research expenses under a higher education contract and when there are not qualified research expenses in each of the three preceding tax periods. The contents of this subsection implement Tax Code, §171.654 (Amount of Credit).

Subsection (f) explains the attribution of qualified research expenses following a transfer of the controlling interest in a taxable entity claiming the credit. The contents of subsection (f) are taken directly from Tax Code, §171.655 (Attribution of Expenses Following Transfer of Controlling Interest).

Subsection (g) provides the credit must be claimed on a combined group report if the qualified research expenses are incurred by a member of a combined group.

Subsection (h) explains both an upper tier entity and a lower tier entity may claim a credit; however, both entities cannot claim a credit for the same expense. Additionally, subsection (h) provides that an upper tier entity that includes the total revenue of a lower tier entity may claim the credit for qualified research expenses incurred by the lower tier entity to the extent of the upper tier entity's ownership interest. The contents of these subsections are taken from Tax Code, §171.656 (Combined Reporting).

Subsection (i) explains that the credit claimed under this section for a report may not exceed 50% of the amount of franchise tax due for the report before any other applicable tax credits. The text of this subsection is taken directly from Tax Code, §171.658 (Limitations).

Subsection (j) allows a credit carryforward for 20 consecutive reports and provides the order in which the credits and credit carryforwards are claimed.

Subsection (k) prohibits assignment of the credit to another entity unless all assets of the taxable entity are conveyed, assigned, or transferred in the same transaction. These subsections are taken directly from Tax Code, §171.659 (Carryforward) and §171.660 (Assignment Prohibited).

Subsection (l) provides that a taxable entity must apply for a credit under this section by claiming the credit on the franchise tax report. The taxable entity must also submit Form 05-178, Texas Franchise Tax Research and Development Activities Credits Schedule. The text of paragraph (1) implements Tax Code, §171.661 (Application for Credit) and §171.662 (Rules). Paragraph (2) explains that the comptroller may require a taxable entity that claims a credit under this section to provide all data and information required by the comptroller to evaluate the credit and to comply with Tax Code, §151.3182(c) (Certain Property Used in Research and Development Activities; Reporting of Estimates and Evaluation). The authority for paragraph (2) is provided by Tax Code, §171.663(b) (Reporting of Estimates and Collection of Information).

Subsection (m) provides the process for amending a report, either to claim a credit under this section, or to repay a credit taken under this section in order to claim a sales and use tax exemption for qualifying research and development purchases under Tax Code, §151.3182. The authority for this subsection is provided by Tax Code, §171.662 (Rules).

No comments were received regarding adoption of the new section.

The new section is adopted under Tax Code, §111.002 (Comptroller's Rules; Compliance; Forfeiture), which provides the comptroller with the authority to prescribe, adopt, and enforce rules relating to the administration and enforcement of the provisions of Tax Code, Title 2 (State Taxation), and under Tax Code, §171.662, (Rules) which provides that the comptroller shall adopt rules and forms necessary to implement Tax Code, Chapter 171, Subchapter M.

The new section implements Tax Code, Chapter 171, Subchapter M (Tax Credit For Certain Research And Development Activities).