(a) Effective dates.
(1) A corporation may claim a research and development credit, a jobs creation credit, or an investment credit only for expenses and payments that the corporation has incurred, qualified investments or expenditures that the corporation made, or new jobs that the corporation has created in Texas on or after January 1, 2000.
(2) These credits expire on December 31, 2009. This expiration does not affect the carryforward or installment of a credit that was established on a report that was due before this expiration date.
(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) “Agricultural processing” means activities that are described in the 1987 Standard Industrial Classification Manual, categories 2011-2099, 2211, 2231, or 3111-3199, which the federal Office of Management and Budget publishes. Examples include manufacturing or processing foods and beverages for human consumption; weaving cotton and wool fabrics; and tanning, currying, or finishing leather and leather products.
(2) “Base amount,” “basic research payment,” and “qualified research expense” have the meanings that Internal Revenue Code, §41 assigns to those terms, except that all such payments and expenses must be for research that is conducted within this state. Qualified research expenses include expenses for research that the taxpayer performs, including wages for employees involved in the research activity, costs of supplies that are used in research, and payments to others for the use of computer time in qualified research. In addition, qualified research expenses include a portion of the expenses for research that other parties perform on behalf of the taxpayer. Basic research payments include payments to qualified university or scientific organizations for research to advance scientific knowledge that does not have a specific commercial objective.
(3) “Central administrative offices” means an establishment that is primarily engaged in the performance of management or support services for other establishments of the same enterprise. An enterprise consists of all establishments that have more than 50% common direct or indirect ownership.
(4) “County average weekly wage” means the average weekly wage for all covered employment in the county as computed based on quarterly data from the Texas Workforce Commission.
(5) “Data processing” means activities that are described in the 1987 Standard Industrial Classification Manual, categories 7371-7379, which the federal Office of Management and Budget publishes. Examples include computer programming, data processing, and other computer related services.
(6) “Distribution” means activities that are described in the 1987 Standard Industrial Classification Manual, categories 5012-5199, which the federal Office of Management and Budget publishes. Examples include the wholesale distribution of durable and nondurable goods, such as motor vehicles, furniture, lumber and other construction materials, professional and commercial equipment, electrical goods, hardware, plumbing and heating equipment, paper and paper products, apparel, and groceries.
(7) “Group health benefit plan” means:
(A) a health plan that a health maintenance organization that is established under the Texas Health Maintenance Organization Act (Tex. Ins. Code, Chapter 20A) provides;
(B) a health benefit plan that the commissioner of insurance has approved; or
(C) a self-funded or self-insured employee welfare benefit plan that provides health benefits and is established in accordance with the Employee Retirement Income Security Act of 1974 (29 U.S.C. §1001 et seq.), as amended.
(8) “Manufacturing” means activities that are described in the 1987 Standard Industrial Classification Manual, categories 2011-3999, which the federal Office of Management and Budget publishes.
(9) “Qualified business” means an establishment that is a central administrative office or that is primarily engaged in agricultural processing, distribution, data processing, manufacturing, research and development, or warehousing. An establishment is a single physical location at which business is conducted or services or industrial operations are performed.
(10) “Qualified capital investment” means tangible personal property that is: described in Internal Revenue Code, §1245(a), such as engines, machinery, tools, and implements that are used in a trade or business, or are held for investment and are subject to an allowance for depreciation, cost recovery under the accelerated cost recovery system, or amortization; and first placed in service in a strategic investment area, or in a Texas county that has a population of less than 50,000, by a corporation that is primarily engaged in agricultural processing. The term does not include real property or buildings and their structural components. Property that is leased under a capitalized lease is considered a “qualified capital investment,” but property that is leased under an operating lease is not considered a “qualified capital investment.” Property that is expensed under Internal Revenue Code, §179, is not considered a “qualified capital investment.” “First placed in service” means the first use of the property by the taxpayer. The property may have been previously used by another taxpayer.
(11) “Qualifying job” means a new permanent full-time job that:
(A) is located in:
(i) a strategic investment area; or
(ii) a Texas county that has a population of less than 50,000, if a business that is primarily engaged in agricultural processing creates the job;
(B) requires at least 1,600 hours of work a year;
(C) pays at least 110% of the county average weekly wage for the county where the job is located;
(D) is covered by a group health benefit plan for which the business pays at least 80% of the premiums for basic coverage or other charges that are assessed under the plan for the employee;
(E) is not transferred from one area in Texas to another area in Texas; and
(F) is not created to replace a job that was previously held by another employee.
(12) “Research and development,” for the purposes of determining whether an establishment constitutes a “qualified business” for the jobs creation credit and the investment credit, means activities that are described in the 1987 Standard Industrial Classification Manual, category 8731, which the federal Office of Management and Budget publishes. These activities are commercial physical and biological research and development activities that are provided on a contract or fee basis.
(13) “Strategic investment area” means an area that the comptroller has determined under Tax Code, §171.726, is:
(A) a Texas county that has above state average unemployment, but below state average per capita income; or
(B) an area in Texas that is a federally designated urban enterprise community or urban enhanced enterprise community.
(14) “Warehousing” means activities that are described in the 1987 Standard Industrial Classification Manual, categories 4221-4226, which the federal Office of Management and Budget publishes. Examples include public warehousing and storage.
(c) Strategic Investment Areas. The comptroller will determine areas that qualify as strategic investment areas not later than October 1 of each year and will publish a list and map of the designated areas. The designation is effective for the following calendar year for purposes of credits that are available under this section. If at the time that the expenditures were made, they were made in a strategic investment area, then the expenditures will be considered in computation of the credits that this section provides, even if the strategic investment area subsequently loses its designation as a strategic investment area.
(d) Information required. A corporation that claims a credit under this section must submit all information that the comptroller requires.
(1) The total research and development, jobs creation, and investment credits that a corporation claims, including the amount of any credit that the corporation carries forward from previous reports, may not exceed the amount of franchise tax due for the report after any other applicable credits.
(2) A corporation that establishes its eligibility for a research and development credit is not eligible to establish a jobs creation credit for the same report.
(3) A corporation may not convey, assign, or transfer to another entity the credits that this section provides, unless all of the assets of the corporation are conveyed, assigned, or transferred to the entity in the same transaction.
(f) Period used. The corporation must use the period upon which earned surplus is based to determine which expenditure will be considered in computing the credits that this section provides, even if the tax that is due on taxable capital exceeds the tax that is due on net taxable earned surplus.
(g) Research and development credit.
(1) Calculation of credit.
(A) The credit for any report equals 5.0% (4.0% for reports that are originally due before January 1, 2002) of the sum of:
(i) the amount of qualified research expenses that a corporation incurs in Texas during the period upon which net taxable earned surplus is based in excess of the base amount for Texas (alternatively, 16% may be used as the Texas fixed base percentage); and
(ii) the basic research payments that are determined under Internal Revenue Code, §41(e)(1)(A), for Texas during the period upon which net taxable earned surplus is based.
(B) A corporation may elect to compute the credit for qualified research expenses that the corporation has incurred in Texas in a manner that is consistent with the alternative incremental credit that is described in Internal Revenue Code, §41(c)(4), but only if for the corresponding federal tax period:
(i) a federal election was made to compute the federal credit under Internal Revenue Code, §41(c)(4);
(ii) the corporation was a member of a consolidated group for which a federal election was made under Internal Revenue Code, §41(c)(4); or
(iii) the corporation did not claim the federal credit under Internal Revenue Code, §41(a)(1).
(C) For purposes of the alternate credit computation method in subparagraph (B) of this paragraph, the credit percentages that apply to qualified research expenses that are described in Internal Revenue Code, §41(c)(4)(A)(i), (ii), and (iii), are 0.41%, 0.55%, and 0.69%, respectively (or 0. 33%, 0.44%, and 0.55%, respectively, for reports that are due before January 1, 2002).
(D) In computing the credit under this subsection, a corporation may multiply by two (or by 1.5 for reports that are originally due before January 1, 2002) the amount of any qualified research expenses and basic research payments that are made in a strategic investment area.
(E) The corporation bears the burden of establishing entitlement to, and the value of, a credit.
(F) For the purposes of calculating the research and development credit, “gross receipts,” as used in Internal Revenue Code, §41, means gross receipts as determined under Tax Code, §171.1032.
(2) Report limitation. The total research and development credit that a corporation may claim for a report, including the amount of any carryforward credit under paragraph (3) of this subsection, may not exceed 50% (or 25% for reports that are due before January 1, 2002) of the amount of franchise tax that is due for the report before any other tax credits are applied.
(3) Carryforward. If a corporation is eligible for a credit that exceeds the limitations that are stated in subsection (e)(1) of this section or paragraph (2) of this subsection, then the corporation may carry the unused credit forward for not more than 20 consecutive reports. A credit carryforward from a previous report must be used before the current year credit.
Source Note: The provisions of this §3.578 adopted to be effective August 27, 2001, 26 TexReg 6316