Franchise Tax Exemptions & Credits

Solar Energy Franchise Tax Exemption

A corporation in Texas engaged solely in the business of manufacturing, selling, or installing solar energy devices is exempted from the franchise tax. There is no ceiling on this exemption provided by Section 171.056 of Texas Tax Code, so it is a substantial incentive for solar manufacturers.

For the purposes of this exemption, a solar energy device means "a system or series of mechanisms designed primarily to provide heating or cooling or to produce electrical or mechanical power by collecting and transferring solar-generated energy. The term includes a mechanical or chemical device that has the ability to store solar-generated energy for use in heating or cooling or in the production of power."

Refund for Job Creation in an Enterprise Zone

Taxpayers located in an enterprise zone that create at least 10 new permanent jobs can qualify for a franchise tax refund. Qualifying firms must be certified by the Texas Economic Development Bank. The refund is the lesser of $5,000 or 25% of the amount of franchise tax due for the period.

Research & Development Tax Credit

Companies engaged in qualified research activities (as defined under federal tax law) in Texas may choose between accepting a sales tax exemption or a franchise tax credit for materials, software and equipment used for R&D purposes.

The credit available is 5% of the difference between: (1) qualified research expenses incurred during the period on which the reporting period and (2) 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based. If the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 2.5% of the qualified research expenses incurred during that period.

An additional franchise tax credit would be available to companies that partnered on research projects with universities and private higher education institutions. In this case, the credit available is 6.25% of the difference between: (1) qualified research expenses incurred during the period on which the reporting period and (2) 50% of the average amount of qualified research expenses incurred during the three tax periods preceding the period on which the report is based. If the taxable entity has no qualified research expenses in one or more of the three tax periods preceding the period on which the report is based, the credit for the period on which the report is based equals 3.125% of the qualified research expenses incurred during that period.

Unused credits may be carried forward.

Relocation Expenses Deduction

Companies may deduct from apportioned margin relocation costs incurred in relocating their main office or other principal place of business to Texas from another state provided the company (1) did not do business in Texas before the relocation and (2) is not a member of an affiliated group engaged in a unitary business, another member of which is already doing business in Texas.

Deductible relocation costs include (1) costs of relocating computers and peripherals, other business supplies, furniture, and inventory; and (2) any other costs related to the relocation that are allowable deductions for federal income tax purposes. The deduction must be taken on the company’s initial franchise tax filing.

Renewable Energy Device Deductions

A taxable entity may deduct from its apportioned margin 10% of the amortized cost of a solar energy device. Under the statute’s definition, wind energy is also included as an eligible technology. A similar deduction is available for equipment associated with a clean coal project.

Tax Credit for Rehabilitation of Historic Structures

A tax credit of 25% of the total eligible costs and expenses incurred in the certified rehabilitation of the certified historic structure can be applied to a taxpayer’s franchise tax due. The tax payer must have an ownership interest in the certified historic structure in the year during which the structure is placed in service after the rehabilitation. Eligible structures are Recorded Texas Historic Landmarks, listed in the National Register of Historic Places, or located in specified historic districts. Eligible costs and expenses are defined by the Internal Revenue Code. Carryforward is available and credits can be sold or assigned.