Is there a 50% limit on the base amount for the Texas franchise-tax research and development credit, and will penalties be waived where the form did not show it?

Plain-English summary

A firm that prepares Texas franchise returns for high-technology clients noticed that the Schedule F form and instructions for the research and development (R&D) credit did not mention a 50% limit on the base amount - a limit that exists for the federal research credit under IRC Sec. 41(c). It asked the Comptroller to clarify.

• Yes, there is a 50% limit. The credit has a base amount limit of 50% of current qualified research expenses.
• The form was fixed. The internet version of Schedule F was changed on October 12, 2001 to show the 50% limit (at line 13); the other versions would be updated as soon as possible.
• Penalty/interest relief. Because the Comptroller agreed the form and instructions were not as clear as they should have been, it will waive penalty and interest for taxpayers who may not have applied the 50% limit, if they pay any additional amount due within 30 days after being notified of the deficiency.

Currency note: This letter concerns the pre-2008 franchise tax and its R&D credit, replaced by the margin tax effective January 1, 2008 (House Bills 3 and 3928). The penalty/interest waiver was a one-time response to a 2001 form correction, and today's franchise R&D credit is a later, separately enacted provision; confirm current law.

What this means for you

Businesses that claimed the old franchise R&D credit

The base amount was capped at 50% of current qualified research expenses, mirroring the federal rule - even though the 2001 Texas form did not initially spell it out. If you under-applied the limit because of the unclear form, the Comptroller offered a penalty- and interest-free path to fix it, so long as you paid within 30 days of notice.

Tax professionals

Two practical points: the pre-2008 franchise R&D credit carried a 50%-of-current-qualified-expenses base limit consistent with IRC Sec. 41(c), and the Comptroller granted equitable penalty/interest relief because its own form was ambiguous. Both the credit and the relief are historical - verify the current margin-tax R&D credit and any present-day form guidance.

Common questions

Q: Was there a 50% limit on the Texas franchise R&D credit base?
A: Yes - a base amount limit of 50% of current qualified research expenses.

Q: Why wasn't it on the form?
A: The form and instructions were unclear; the internet Schedule F was corrected on October 12, 2001 (line 13), with other versions to follow.

Q: Could penalties be avoided if I missed the limit?
A: Yes. The Comptroller agreed to waive penalty and interest if the additional amount due was paid within 30 days after notice of the deficiency.

Citations and references

Federal reference:

• Internal Revenue Code Sec. 41(c) - the 50% base-amount limitation the requestor cited from the federal research credit

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=FIT
• Opinion: https://star.comptroller.texas.gov/view/200111635L

Original ruling text

November 28, 2001

Dear **,

Thank you for your email concerning the research and development credit for
franchise tax. I apologize for the delay in this response.

1. There is a base amount limit of 50% of current qualified research expenses.

2. The internet version of Schedule F
   (www.window.state.tx.us/taxinfo/taxforms/05-forms.html) was changed on October
   12, 2001, to reflect this limit. Item (line) 13 was changed to show the 50%
   limit. The other versions of Schedule F will be changed as soon as possible.
   Because we agree with you that the form and instructions were not as clear as
   they should have been, we will waive any penalty and interest for taxpayers who
   may not have used the 50% limit and who pay any additional amount due within 30
   days after we notify them of the deficiency.

If you have any questions, please do not hesitate to email me or call me toll
free at 1-800-531-5441, extension 34662.

Sincerely,

Jerry Oxford
Tax Policy Division

On Wed, 19 Sep 2001 08:47:05 -0500 ** wrote:

Dear Sir or Madam,

Our firm prepares many Texas franchise tax returns for high technology clients.
In preparing a 2001 return, it came to my attention that in computing the base
period expenses on line 11, the instructions did not refer to a 50% limitation
as found in Section 41(c) of the IRC.
Unlike the federal research credit form the Texas form itself does not have any
place where a 50% limitation may be computed. In fact the software does not
allow you to change the computed base amount unless an override is utilized.

My concern is twofold

1. Is there a 50% limitation for computing base period research expenses or do
   you merely multiply the appropriate percentage by the qualified expenditures?

2. If there is a 50% limitation, then I believe that in all fairness to
   taxpayers, the form should either be revised or instructions issues advising
   taxpayer's of this limitation.

Cordially,