Texas Comptroller of Public Accounts    STAR System


200108452R



STAR SUPERSEDED WITHOUT SUMMARY 

Accession No.(s): 200108452R

Document superseded on: 08/15/2013 



STATE OF TEXAS
COMPTROLLER OF PUBLIC ACCOUNTS
FRANCHISE TAX


Section 3.578.  Economic Development Credits.

(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, sec. 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. sec. 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, sec. 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, sec. 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, sec. 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.

(e)  Limitations.

(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, sec. 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, sec. 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, sec. 41(c)(4);

(ii)  the corporation was a member of a consolidated group for which a federal 
election was made under Internal Revenue Code, sec. 41(c)(4); or

(iii)  the corporation did not claim the federal credit under Internal Revenue 
Code, sec. 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, sec. 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, sec. 41, means gross 
receipts as determined under Tax Code, sec. 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.

(h)  Jobs creation credit.

(1)  Eligibility.  A corporation is eligible for a jobs creation credit if the 
corporation:

(A)  is a qualified business;

(B)  creates a minimum of 10 qualifying jobs during the period upon which net 
taxable earned surplus is based; and

(C)  pays an average weekly wage of at least 110% of the county average weekly 
wage for the county where the qualifying jobs are located.

(2)  Calculation of credit.  A corporation may establish a credit that equals 
25% of the total wages and salaries that the corporation has paid for 
qualifying jobs during the period upon which net taxable earned surplus is 
based.

(3)  Length of credit.  A corporation shall claim the credit established in 
five equal installments of one-fifth the credit amount over the five 
consecutive reports beginning with the report based upon, for determining net 
taxable earned surplus, the period during which the corporation created 
qualifying jobs.

(4)  Report limitation.  The total jobs creation credit that a corporation 
claims for a report, including the amount of any carryforward credit under 
paragraph (5) of this subsection, may not exceed 50% of the amount of franchise 
tax that is due for the report before any other tax credits are applied.

(5)  Carryforward.  If a corporation is eligible for a credit from an 
installment that exceeds the limitations that are stated in subsection (e)(1) 
of this section or paragraph (4) of this subsection, then the corporation may 
carry the unused credit forward for not more than five consecutive reports.  A 
carryforward is the remaining portion of an installment that cannot be claimed 
in the current year because of the limitations that are stated in subsection 
(e)(1) of this section or paragraph (4) of this subsection.  A carryforward is 
added to the next year's installment of the credit in determination of the 
limitations for that year.  A credit carryforward from a previous report must 
be used before the current year installment.

(6)  Certification of eligibility.  For the initial and each succeeding report 
in which a jobs creation credit is claimed, the corporation shall file with its 
report, on a form that the comptroller provides, information that sufficiently 
demonstrates that the corporation is eligible for the credit and is in 
compliance with paragraph (1) of this subsection.  The corporation bears the 
burden of establishing entitlement to, and the value of, the credit.  If during 
one of the five periods used to determine earned surplus for a report on which 
an installment could be claimed, the number of the corporation's full-time 
employees falls below the number of full-time employees the corporation had 
during the period in which the corporation qualified for the credit, then the 
credit expires and the corporation may not take any remaining installment of 
the credit.  The corporation may, however, take the portion of an installment 
that accrued in a previous year and was carried forward, to the extent that 
paragraph (5) of this subsection permits.  In application of the terms of this 
paragraph, for an employee to be considered a full-time employee, the employee 
must be in a job that requires at least 1,600 hours of work for the corporation 
each year, as subsection (b)(11)(B) of this section provides.  The number of 
full-time employees whom the corporation had employed during the period in 
which the corporation qualified for the credit refers to the highest number of 
full-time employees whom the corporation had employed during the period in 
which the corporation qualified for the credit.  A corporation has 90 days to 
refill a position after an employee has left employment with the corporation.  
For example, assume that a corporation with a calendar year accounting year end 
had employed 1,010 full-time employees in calendar year 2000, including 10 
qualifying jobs that the corporation had created during the year, as subsection 
(b)(11)(B) of this section provides.  The corporation may then claim the credit 
in five equal installments
 over the five consecutive reports beginning with its 2001 annual report, which 
report will be based upon the period during which the qualifying jobs were 
created (i.e., calendar year 2000).  If, for example, during the calendar year 
2002, the number of full-time employees whom the corporation employs falls 
below 1,010, the credit expires, and the corporation may not take the 
installments that would have been available for the annual reports due in 2003, 
2004, and 2005.

(i)  Investment credit.

(1)  Eligibility.  If a corporation does not have employees who are stationed 
full-time at the site of the qualified capital investment, then "location" 
means the site, within the same strategic investment area, from which the 
qualified capital investment is serviced.  To qualify for the investment 
credit, a qualified business must:

(A)  pay an average weekly wage, at the location for which the credit is 
claimed, that amounts to at least 110% of the county average weekly wage;

(B)  offer coverage by a group health benefit plan to all full-time employees 
at the location for which the credit is claimed, 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 employees; and

(C)  make a minimum $500,000 qualified capital investment during the period 
upon which net taxable earned surplus is based.

(2)  Calculation of credit.  A corporation may establish a credit that equals 
7.5% of the qualified capital investment during the period upon which net 
taxable earned surplus is based.

(3)  Length of credit.  A corporation shall claim the credit established in 
five equal installments of one-fifth the credit amount over the five 
consecutive reports beginning with the report based upon, for determining net 
taxable earned surplus, the period during which the corporation made the 
qualified capital investment.

(4)  Report limitation.  The total investment credit that a corporation claims 
for a report, including the amount of any carryforward credit under paragraph 
(5) of this subsection may not exceed 50% of the amount of franchise tax that 
is due for the report before any other tax credits are applied.

(5)  Carryforward.  If a corporation is eligible for a credit from an 
installment that exceeds the limitations that are stated in subsection (e)(1) 
of this section or paragraph (4) of this subsection, then the corporation may 
carry the unused credit forward for not more than five consecutive reports.  A 
carryforward is the remaining portion of an installment that cannot be claimed 
in the current year because of the limitations that are stated in subsection 
(e)(1) of this section or paragraph (4) of this subsection.  A carryforward is 
added to the next year's installment of the credit in determination of the 
limitations for that year.  A credit carryforward from a previous report must 
be used before the current year installment.

(6)  Certification of eligibility.  For the initial and each succeeding report 
in which an investment credit is claimed, the corporation shall file with its 
report, on a form that the comptroller provides, information that sufficiently 
demonstrates that the corporation is eligible for the credit and is in 
compliance with paragraph (1) of this subsection.  The qualified business bears 
the burden of establishing entitlement to, and the value of, the credit.

(7)  Ineligibility.  

(A)  An investment credit expires and the corporation may not take any 
remaining installment of the credit, (except the corporation is permitted to 
take the portion of an installment that accrued in a previous year and was 
carried forward pursuant to paragraph (5) of this subsection), if, during one 
of the five periods used to determine earned surplus for a report on which an 
installment could be claimed, the qualified business:

(i)  disposes of the qualified capital investment;

(ii)  takes the qualified capital investment out of service;

(iii)  moves the qualified capital investment out of Texas; or

(iv)  fails to pay an average weekly wage as subparagraph (1)(A) of this 
subsection provides.

(B)  For purposes of subparagraph (A)(i)-(iii) of this paragraph, an 
installment may still be taken if the qualified capital investment is replaced 
at the same location within 90 days with a new qualified capital investment of 
equal or greater value.  However, if the corporation chooses to take the 
installment from the original qualified capital investment, then the 
corporation would not be allowed to take the investment credit on the new 
qualified capital investment.  For example, assume in 2002 a calendar-year 
corporation made a $600,000 qualified capital investment and took the 
investment credit on its 2003 and 2004 annual franchise tax reports.  Then, in 
late 2004, the corporation replaced an $80,000 machine, that was part of the 
original $600,000 qualified capital investment, with a better $130,000 machine. 
 The corporation may continue to take the installments from the original 
$600,000 qualified capital investment, or, if the new $130,000 machine was part 
of at least $500,000 of qualified capital investments made in 2004, then the 
corporation may forego the installments from the original investment and begin 
taking a new investment credit based on the qualified capital investments made 
in 2004.

(8)  Limitation.  A corporation that establishes its eligibility for an 
investment credit is not eligible to claim a franchise tax reduction that is 
authorized under Tax Code, sec. 171.1015.


Effective Date:  August 27, 2001
Filed with Secretary of State:  August 7, 2001




ACCESSION NUMBER: 200108452R
SUPERSEDED: Y
DOCUMENT TYPE: R
DATE: 08/27/2001
TAX TYPE: FRANCHISE