More specifically, in addition to the Federal-Level Research and Development Tax Credit pursuant to I.R.C. § 41, there are now approximately forty states that offer research tax incentives and these states generally follow the federal statutory, administrative and judicial interpretations on what constitutes Qualified Research Activities (hereinafter “QRAs”) and Qualified Research Expenditures (hereinafter “QREs”) with the notable exception of states such as Connecticut which lowers the threshold to utilize the I.R.C. §  174 research and experimental expenditures definition for QREs.

It should be duly noted that state level research tax incentives can be much more lucrative than the federal tax credit because states often provide generous research tax incentives to encourage taxpayers to perform research and other business activities within their respective states. As a caveat, there are clearly distinctions in other state research and development incentive programs as well, such as California which generally follows the federal rules, but utilizes a different gross receipts calculation to include only sales of real, tangible, or intangible property held for sale to customers in the ordinary course of the taxpayer’s trade or business delivered or shipped to a purchaser within California, but does not include service-related receipts, rents or interest. Furthermore, in addition to offering a research incentive, some states may allow an entity in a loss position (e.g., without a current tax liability in which to utilize the credit against) to immediately monetize their credit (e.g., “cash-in” the credit at a discounted selling price) with the state (e.g., Connecticut) or transfer it to a third party that may be able to utilize it (e.g., New Jersey), rather than carry it forward to a future year when a company has a tax liability to utilize it against.

A Synopsis of the Newly Enacted Texas Research Tax Credit

The Texas legislature worked diligently and collaboratively this month to pass House Bill 800, which ultimately will bring back to Texas their version of a research tax credit and will ultimately drive business back to Texas helping to create thousands of research and development based jobs for the State. The Texas research tax credit had previously expired and lapsed for several years without being retroactively renewed due in part to the recession.

The new and improved State credit is available for companies that design, develop, and / or manufacture in the state of Texas and applies to both a company’s new product development efforts as well as their manufacturing process improvements. It should be duly noted that this state credit, similar to the federal credit, can be broadly applied to virtually all industries including, but certainly not limited to, Life Science Companies (e.g., Pharmaceuticals, Bio-Technology, Medical Devices); Food Sciences Companies (e.g., including Bio-Flavoring);  Energy, Chemicals, Natural Gas, and Oil Companies; Aerospace & Defense Companies; Electronics and Software Companies; amongst countless others industries.

Companies need to claim this Texas credit not only because it reduces the state level effective tax rate, but because it truly compliments the federal credit in further reducing the cost of a company’s research and development spend and appropriately tax effects a company’s research and development spend for both tax accrual and tax return purposes.