Article
Texas clarifies three major changes to the R&D tax credit
Feb. 17, 2022 · Authored by Tom Sanger, Jason Hall
Texas clarified its rules concerning application of the Texas R&D tax credit and the sales and use tax exemption for materials used in R&D, through guidance issued on Oct. 15, 2021.
While the rules are generally more restrictive, they do provide helpful clarification and useful examples of the types of activities that may still be eligible for the credit.
These changes will impact Texas taxpayers claiming the state R&D credit or sales and use tax exemption for R&D activities in Texas.
Each company’s goals, values, and resources are unique, which makes it important to develop a customized project plan to identify, calculate, and support your company’s R&D tax credits and activities.
Services don’t qualify as business components
To qualify, the taxpayer must develop a new or improved business component. A business component is a product, process, formula, technique, invention, or piece of software.
Because a service isn’t a product or any other of the enumerated business components, expenses incurred for providing services to customers don’t qualify. However, a service may qualify if it results in delivery of one of the enumerated business components.
For example, expenses incurred preparing a product design for sale, lease, or license may not qualify. However, the expenses may qualify if the design culminates in the development or fabrication of a tangible product.
Many software development activities no longer qualify
Some potentially qualified software activities are:
- Development of an initial release of a software application that incorporates new algorithms, architectures, or database management techniques
- Development of specialized technologies, such as artificial intelligence, image processing, or speech recognition
These activities related to software development are unlikely to qualify for exemptions:
- Functionality enhancements to an existing product
- Porting existing software application to a new framework or programming language
- Development of graphical user interfaces (GUIs) and user experience (UX) design
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.