Texas Taxes Tax Publications

Franchise Tax Credits
For Economic Development

February 2001

Introduction
Summary of Economic Development Credits
What is the franchise tax?
The credits
Strategic Investment Areas
Strategic Investment Areas -- Federal Urban Enterprise Communities

The Texas Legislature created three franchise tax credits for economic development. Eligible corporations may take advantage of certain research and development, capital investment, and jobs creation credits.

The Legislature created three franchise tax credits for economic development. Eligible corporations may take advantage of these credits for certain research and development expenses and payments incurred, for qualified capital investments or expenditures made, or for certain new jobs created in Texas on or after January 1, 2000.

Corporations who operate in strategic investment areas (SIAs) may qualify for special benefits, described below. An SIA is a Texas county with above state-average unemployment and below state-average per-capita income, or an area within Texas that has been designated by the federal government as an urban enterprise community or an urban enhanced enterprise community. For information and a list of designated SIAs, please see Strategic Investment Areas.

In addition, corporations primarily engaged in agricultural processing in a Texas county with a population of less than 50,000 may qualify for the jobs creation and capital investment credits. A list of those counties is included in the Strategic Investments Areas section of this brochure.

The Comptroller will determine which areas qualify as SIAs by September 1 of each year and will publish a list and map of SIAs by October 1 of each year. The designation will be effective for the following calendar year for purposes of the credits. Additionally, a corporation will be allowed to claim a credit or carry forward a credit without regard to whether the SIA in which the corporation incurred expenses or made payments subsequently loses the SIA designation.

We will provide forms on which to establish and claim the credits.

The sum of the three credits cannot exceed 100 percent of a corporation's franchise tax liability, after any other applicable tax credits.

The following information provides a short overview of the franchise tax, a detailed explanation of the research and development (R&D), jobs creation, and capital investment credits, and lists and maps of the SIAs. If you have questions that are not answered by this brochure, please contact us via e-mail at <tax.help@cpa.state.tx.us> or call the franchise tax assistance toll-free line at 1-800-252-1381.

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Summary of Economic Development Credits

CREDIT	RESEARCH AND DEVELOPMENT	JOBS CREATION	CAPITAL INVESTMENT
Amount of credit	4 percent of qualified expenses to be taken on a report due before January 1, 2002; Changes to 5 percent of qualified expenses to be taken on a report due after January 1, 2002	25 percent of wages paid for new qualifying jobs created in strategic investment areas; credit must be claimed in equal installments over 5 years	7.5 percent of qualified investment made in strategic investment areas; credit must be claimed in equal installments over 5 years
Expenditures to which credit applies	Excess of qualified research expenses in Texas over base year, plus basic research payments in Texas; Expenses must be incurred on or after January 1, 2000	Salary and wages paid for new qualifying jobs in central administrative offices, distribution, data processing, manufacturing, research and development, or warehousing; Applies to new jobs created on or after January 1, 2000	Investments in depreciable tangible personal property in central administrative offices, distribution, data processing, manufacturing, research and development, or warehousing; Applies to qualified investments made on or after January 1, 2000
Areas of state where credit may be established	Statewide, but expenditures in strategic investment areas qualify for bonus	Strategic investment areas (special provision for agricultural processors)	Strategic investment areas (special provision for agricultural processors)
Limitations	Credit may not exceed 25 percent of franchise tax due before credits for franchise tax reports due before January 1, 2002; Credits may not exceed 50 percent of tax due for franchise tax reports due after January 1, 2002	Credit may not exceed 50 percent of franchise tax due before credits	Credit may not exceed 50 percent of franchise tax due before credits
Carryforward	20 years	5 years	5 years
Expiration	December 31, 2009 (accumulated credits may still carryforward)	December 31, 2009 (accumulated credits may still carryforward)	December 31, 2009 (accumulated credits may still carryforward)
Other Provisions	Credit may not be combined with job creation credit	At least ten new full-time jobs must be created; must pay 110 percent of county average weekly wage and include health insurance; cannot be combined with R&D credit	A minimum investment of $500,000 is required; jobs at location of investment must pay 110 percent of county average weekly wage and include health insurance

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WHAT IS THE FRANCHISE TAX?

The franchise tax is imposed on each corporation that is chartered in Texas or has a Certificate of Authority to do business in Texas. Non-Texas corporations doing business in Texas without a Certificate of Authority are also liable for Texas franchise tax. See Franchise Tax Rule 3.546 for a list of some activities considered to be "doing business in Texas."

The term "corporation" also includes a bank, limited liability company, S corporation, state limited banking association, savings and loan association, professional limited liability company, and a professional corporation. However, professional associations and limited liability partnerships are not liable for the franchise tax. Non-Texas corporations wanting to obtain a Certificate of Authority may contact the Texas Secretary of State.

How the Tax is Computed
Corporations pay the greater of the tax on net taxable capital or net taxable earned surplus. The rates and computations discussed below are effective for reports originally due on or after January 1, 1994.

Taxable Capital
Taxable capital is a corporation's stated capital (capital stock) plus surplus. Taxable capital is apportioned using a single gross receipts factor.

Taxable capital for an annual report is based on financial information as of the end of the corporation's last accounting period in the year before the year in which the report is due.

The tax rate on taxable capital is 0.25 percent.

Earned Surplus
Earned surplus includes federal net taxable income, plus compensation paid to officers and directors of a corporation. S corporations and corporations with fewer than 36 shareholders are generally exempt from the compensation add-back. Taxable earned surplus is apportioned using a single gross receipts factor.

Earned surplus for an annual report should be reported beginning with the day after the ending date on the previous franchise tax report and ending with the end of the corporation's last federal accounting period in the year prior to the year in which the report is due.

The tax rate on earned surplus is 4.5 percent.

No Minimum Tax
Corporations that owe less than $100 do not pay any tax, but they must file a report. In addition, for reports due on or after January 1, 2000, corporations will not owe any tax if the gross receipts from their entire business for both taxable capital and taxable earned surplus are each less than $150,000 during the period upon which the tax is based, but they must file an abbreviated information report.

Annual Reports
Annual reports are due by May 15 of each year. The report and tax paid cover the privilege period from January 1 through December 31 of the year the report is due.

For more information about the tax, please see Publication #96-114, The Texas Franchise Tax on Corporations.

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THE CREDITS

Research and Development (R & D)
A corporation may claim a credit for certain incremental qualified research expenses incurred and basic research payments made for research conducted in Texas during the period upon which the tax is based.

The law defines "basic research payment" and "qualified research expense" by reference to Section 41, Internal Revenue Code. Under that provision, "qualified research expenses" include expenses for research performed by the corporation, including wages for employees involved in the research activity, costs of supplies used in research, and payments to others for computer time used in qualified research. In addition, qualified research expenses include a portion of the expenses for research performed by other parties on the corporation's behalf. "Basic research payments" include payments to qualified university or scientific organizations for research to advance scientific knowledge not having a specific commercial objective.

Amount of Credit
For reports originally due prior to January 1, 2002, the R & D credit equals 4 percent of qualifying expenses and payments. For reports originally due on or after January 1, 2002, the credit equals 5 percent of qualifying expenses and payments. In computing the credit, a corporation will receive a bonus for any qualified R & D expenditures made in a strategic investment area (SIA). For reports originally due prior to January 1, 2002, a corporation may multiply by 1.5 the amount of any qualified R & D expenditures made in an SIA. For reports due on or after January 1, 2002, a corporation may double the amount of such expenditures made in an SIA.

Although corporations primarily engaged in agricultural processing in a Texas county with a population of less than 50,000 may qualify for the jobs-creation and capital investment credit, they cannot qualify for the research credit bonus - unless the qualified R & D expenditures are made in an SIA.

Limitations on Credit
For reports originally due on or after January 1, 2000, and before January 1, 2002, the total R & D credit is limited to 25 percent of the tax due on the report before other tax credits. For reports originally due on or after January 1, 2002, the total R & D credit for a report (including any credit carryforward) is limited to 50 percent. Any unused credit may be carried forward until the credit is used for up to 20 consecutive reports.

A corporation that establishes an R & D credit cannot establish a jobs-creation credit in the same period. However, a corporation with an R & D credit carryforward may establish a jobs-creation credit in a period to which an R & D credit is carried forward.

Example - Corporation A increases its qualified research expenses by $200,000 and makes basic research payments of $200,000 in Texas during calendar year 2000. Corporation A has a calendar year accounting period. The amount of R & D credit that Corporation A can establish on its 2001 annual report is $16,000 [($200,000 +$200,000) x 4%]. If Corporation A increased its qualified research and development expenses and made its basic research payments in an SIA, it would have been able to multiply the $400,000 amount by 1.5, totaling $600,000 for purposes of calculating the credit. The R & D credit would then have been $24,000 [$600,000 x 4%]. Corporation A's franchise tax due before any other credits on its 2001 report is $40,000. The R & D credit is $10,000 ($40,000 x 25%) and the $14,000 difference can be carried forward, until used, for 20 years.

During calendar year 2001, Corporation A again increases its qualified research expenses by $500,000 and makes basic research payments of $500,000, both in an SIA. The amount of R & D credit that Corporation A can establish on its 2002 annual report is $100,000 [($500,000 + $500,000) x 2 (SIA bonus) x 5%]. Corporation A's franchise tax due before any other credits on its 2002 report is $250,000. The $100,000 credit from the 2002 report and the $14,000 carryforward from the 2001 report can both be used on the 2002 report.

Let's assume everything is the same, except that Corporation A calculates a tax due of $150,000 (rather than $250,000) before any other credits on its 2002 annual report. Corporation A could claim an R & D credit carryforward of $14,000 from the 2001 report, plus $61,000 credit from the 2002 report, for a total of $75,000 on its 2002 report - Corporation A would have a $39,000 credit to carry forward to the next year's franchise tax report (or until the credit is used for up to 20 reports). Corporation A could establish a jobs-creation credit on its 2003 report, as well as apply its $39,000 R & D credit carryforward to the 2003 report.

Jobs-Creation
To be eligible for a jobs-creation credit, a corporation must be a qualified business and must create at least 10 qualifying jobs. In addition, the corporation must pay an average weekly wage for each year in which credits are claimed of at least 110 percent of the county-average weekly wage for the counties where the jobs are located.

Qualified Business
A qualified business is an establishment primarily engaged in one of the following lines of business:

• agricultural processing - is activities described in the 1987 Standard Industrial Classification (SIC) Manual published by the federal Office of Management and Budget codes 2011-2099, 2211, 2231, or 3111-3199, such as manufacturing or processing foods and beverages for human consumption; weaving cotton and wool fabrics; and tanning, currying, and finishing leather and leather products.
• providing central administrative office services - examples include performing management or support services for related entities.
• manufacturing - is activities described in SIC codes 2011-3999, such as engaging in the mechanical or chemical transformation of materials or substances into new products; assembling component parts of manufactured products, if the new product is neither a structure nor other fixed improvement; and blending of materials, such as lubricating oils, plastic toxins, or liquors.
• distribution - is activities described in SIC codes 5012-5199, for example, the wholesale distribution of durable and/or nondurable goods, such as motor vehicles, furniture, lumber and other construction materials, professional and commercial equipment, electrical goods, hardware and plumbing and heating equipment, paper and paper products, apparel, and groceries.
• data processing - is activities described in SIC codes 7371-7379, such as computer programming, data processing, and other computer related services.
• research and development - is activities described in SIC code 8731, which are commercial physical and biological research and development provided on a contract or fee basis.
• warehousing - is activities described in SIC codes 4221-4226, such as public warehousing and storage.

Qualifying Job
A "qualifying job" is a new permanent full-time job that is located in a strategic investment area, or, if the job is created by a business primarily engaged in agricultural processing, a Texas county with a population of less than 50,000. A "qualifying job" requires at least 1,600 hours of work a year, and pays at least 110 percent of the county average weekly wage for the county where the job is located. The job must be covered by a group health benefit plan for which the corporation pays at least 80 percent of the premiums or other charges assessed under the plan for the employee. The job must not be transferred from one area in Texas to another, and must not be created to replace a previous employee. A "qualifying job" must meet all of these requirements.

Amount of Credit
The credit equals 25 percent of total wages and salaries paid for qualifying jobs for the applicable year. The credit must be taken in five equal installments over the five consecutive reports beginning with the report based upon the period during which the qualifying jobs were created.

Limitations on Credit
The total credit for a report (including any credit carryforward) is limited to 50 percent of the tax due on the report before any other applicable credits. A corporation eligible for a credit from an installment that exceeds the 50 percent limitation amount may carry forward the unused portion of the installment until used for up to 5 consecutive reports.

A corporation that establishes the jobs-creation credit cannot establish the R & D credit in the same period. However, a corporation with a jobs-creation credit carryforward may establish an R & D credit in a period to which a jobs-creation credit installment is taken or carried forward.

Example - Corporation B is a qualified business that creates 10 qualifying jobs during calendar year 2000 for which it pays an average weekly wage of at least 110 percent of the county-average weekly wage. Corporation B has a calendar year accounting period. The total wages and salaries paid for these 10 qualifying jobs during calendar year 2000 is $400,000. The amount of the credit is $100,000 [$400,000 x 25%]. The amount of each installment is $20,000 [$100,000 divided by 5]. Corporation B's franchise tax due before any other credits on its 2001 annual report is $36,000. The jobs-creation credit is limited to $18,000, and the $2,000 difference can be carried forward, until used, for up to five consecutive reports.

Corporation B creates 4 additional qualifying jobs during calendar year 2001. Corporation B does not qualify for a new jobs creation credit for calendar year 2001 because it created fewer than 10 new jobs during the year. Had Corporation B created at least 10 new jobs during 2001, then Corporation B would have established a new credit.

Let's assume that Corporation B created 15 new jobs during 2001. The total wages and salaries for the 15 new qualifying jobs during calendar year 2001 is $600,000. The amount of the credit is $150,000 [$600,000 x 25%]. The amount of each installment is $30,000 [$150,000 divided by 5]. Corporation B's franchise tax due before any other credits on its 2002 annual report is $200,000. The $30,000 installment for the 2002 annual report, the $20,000 installment (the second of five from the wages and salaries paid in the year 2000) and the $2,000 carryforward from the 2001 annual report can all be used on the 2002 annual report.

Loss of Credit
The jobs-creation credit expires and remaining installments may not be taken if, during one of the 5 years in which the credit installment accrues, the number of full-time employees falls below the number of employees the corporation had in the year it qualified for the credit. The corporation may still take any portion of an installment that accrued in a previous year and was carried forward.

Capital Investment
A corporation may use a capital investment credit to reduce its franchise tax liability.

To take advantage of this credit a corporation must:

• be a qualified business - using the same definition as "qualified business" for purposes of the jobs-creation credit;
• pay an average-weekly wage that is at least 110 percent of the county-average weekly wage in the county where the job is located;
• offer a specified group health benefit plan to all full-time employees, for which the corporation pays at least 80 percent of the costs; and
• make a minimum $500,000 qualified capital investment (QCI).

Qualified Capital Investment (QCI)
A qualified capital investment is tangible personal property first placed in service in an SIA, or, if the QCI is made by a corporation primarily engaged in agriculture processing, first placed in service in a Texas county with a population under 50,000.

Tangible Personal Property
For purposes of this credit, tangible personal property means engines, machinery, tools, etc., used in a trade or business or held for investment and subject to depreciation or amortization, as described in Section 1245(a) of the Internal Revenue Code. The term includes tangible personal property leased under a capitalized lease. A "capitalized lease" means a transaction that is classified as a purchase for federal income tax purposes even though it is called a "lease."

For purposes of this credit, tangible personal property does not include:

• real property or buildings (and their structural components, such as building materials);
• property leased under an operating lease; and
• property that the corporation elects to expense under Section 179 of the Internal Revenue Code. (Section 179 allows a taxpayer to expense part of the cost of certain tangible personal property, rather than recover the cost over a number of years through depreciation.)

Amount of Credit
The credit equals 7.5 percent of the qualified capital investment during the period upon which the tax is based. The credit must be taken in five equal installments over the five consecutive reports beginning with the report based upon the period during which the QCI was made.

Limitations on Credit
The total credit for a report (including any credit carryforward) is limited to 50 percent of the tax due for the report before other applicable tax credits. A corporation eligible for a credit from an installment that exceeds the 50 percent limitation amount may carry forward the unused portion of the installment until used for up to 5 consecutive reports.

A corporation that establishes a capital investment credit cannot claim the enterprise zone deduction authorized under Section 171.1015. (A corporation designated as an enterprise project may reduce its apportioned taxable capital or apportioned taxable earned surplus by qualifying capital investments made in the enterprise zone in which the enterprise project is located. For more information about the enterprise zone deduction, see Franchise Tax Rule 3.561.)

Example - Corporation C is a qualified business that purchases and places in service on December 1, 2000, in an SIA, a $1 million piece of machinery. Corporation C has a calendar year accounting period. The amount of the credit is $75,000 [$1,000,000 x 7.5%]. The amount of each installment is $15,000. Corporation C's franchise tax due before any other credits on its 2001 annual report is $24,000. The capital investment credit is $12,000 and the $3,000 difference can be carried forward, until used, for 5 years.

Corporation C's franchise tax due before any other credits on its 2002 annual report is $50,000. The $15,000 installment (the second of five from the investment made in the year 2000) and the $3,000 carryforward can both be used on the 2002 annual report.

Loss of Credit
The capital investment credit expires and remaining installments may not be taken if, during any one of the 5 years in which the credit installment accrues, the corporation:

• disposes of the QCI;
• takes the QCI out of service;
• moves the QCI out of state; or
• fails to make wage payments as required by the law.

The corporation may still take the portion of an installment that accrued in a previous year and was carried forward.

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STRATEGIC INVESTMENT AREAS FOR 2001

The franchise tax job creation and investment credits, as well as the research credit bonus, are available to certain corporations located in the state's Strategic Investment Area (SIA). The SIA is a collection of counties and sub-county areas within which job creation, investment and research activities by businesses can lead to franchise tax credits.

The SIA determination is performed by the Comptroller's office each September, and the determination is effective for business activity in the subsequent calendar year.

Of the state's 254 total counties, 224 will be wholly or partially included in the strategic investment area for calendar 2001.

One hundred fourteen (114) counties qualify for the full-purpose SIA designation based on their relative unemployment rate and per-capita income. This designation will permit certain corporations located in these counties to apply for job creation and investment credits as well as the research credit bonus.*

Anderson Brooks Crane Duval Gaines Hardeman Jefferson LaSalle Maverick Pecos Robertson Scurry Trinity Webb Zapata

Andrews Calhoun Crockett Eastland Galveston Hardin Jim Hogg Leon Mitchell Polk Runnels Shackelford Tyler Wharton Zavala

Angelina Cameron Crosby Ector Garza Harrison Jim Wells Liberty Morris Potter Rusk Shelby Upshur Wichita

Aransas Camp Culberson Edwards Gray Hidalgo Kinney McCulloch Newton Presidio Sabine Starr Upton Willacy

Bailey Cass Dawson El Paso Gregg Hockley Kleberg McMullen Nolan Reagan San Augustine Stonewall Uvalde Winkler

Bee Cochran Deaf Smith Fannin Grimes Howard Knox Marion Nueces Red River San Patricio Sutton Val Verde Wood

Bowie Coleman Dickens Floyd Hale Hutchinson Lamar Martin Orange Reeves San Saba Terry Waller Yoakum

Brazoria Cottle Dimmit Frio Hall Jasper Lamb Matagorda Panola Refugio Schleicher Titus Ward Young

Another group of 106 counties only qualify for the limited purpose SIA designation based on their population. Corporations engaged in agricultural processing in these counties can apply for the job creation and investment credits.

Archer Bosque Carson Colorado Erath Glasscock Hill Jeff Davis King Loving Montague Rains Sterling Wilson

Armstrong Brewster Castro Comanche Falls Goliad Hood Jones Lampasas Lynn Moore Real Swisher Wise

Atascosa Briscoe Chambers Concho Fayette Gonzales Hopkins Karnes Lavaca Madison Motley Roberts Terrell

Austin Brown Cherokee Cooke Fisher Hamilton Houston Kendall Lee Mason Navarro Rockwall Throckmorton

Bandera Burleson Childress Dallam Foard Hansford Hudspeth Kenedy Limestone Medina Ochiltree San Jacinto Van Zandt

Baylor Burnet Clay Delta Franklin Hartley Irion Kent Lipscomb Menard Oldham Sherman Washington

Blanco Caldwell Coke DeWitt Freestone Haskell Jack Kerr Live Oak Milam Palo Pinto Somervell Wheeler

Borden Callahan Collingsworth Donley Gillespie Hemphill Jackson Kimble Llano Mills Parmer Stephens Wilbarger

Notes on Strategic Investment Areas
An area of the state may qualify for inclusion in the strategic investment area (SIA) on any of three separate determinations.

• All counties in the state that have both an annual county unemployment rate higher than the statewide rate, and an annual per-capita income lower than the state amount are included in the SIA.
• Second, all sub-county areas in the state that are designated as federal urban enterprise communities are included in the SIA.
• Finally, all counties in the state with a population of less than 50,000 are included in the SIA for limited purposes. Taxpayers located in a county having only a limited-purpose designation are eligible for credits only if the firm is engaged in agricultural processing.

The Comptroller's office is assigned the task of determining the composition of the SIA each September and results are announced by October I of each year. The designation is valid for the subsequent calendar year.

  

*	The tax credit is available only to firms engaged in manufacturing, warehousing, wholesale distribution, computer services, or research laboratories.

For larger view of Strategic Investment Areas for Calendar 2001, Franchise Tax Credits for Research, Jobs Creation, and Investment, click on the Texas map.

Five sub-county zones meet the criteria to qualify for the full-purpose SIA based on their designation as a federal urban enterprise community.

Area Name	County	For view of a county map showing Strategic Investment Areas, click on the county name at left.
Dallas Urban Enterprise Community	Dallas (pdf)
El Paso Urban Enterprise Community	El Paso
Houston Urban Supplemental Enterprise Community	Harris(pdf)
San Antonio Urban Enterprise Community	Bexar
Waco Urban Enterprise Community	McLennan

Because El Paso county is included in the SIA based on its unemployment and per-capita income, the entire county is included in the SIA. Dallas, Harris, Bexar, and McLennan counties are included in the SIA only to the extent of the sub-county zone boundaries.

Need More Assistance?
Email us at tax.help@cpa.state.tx.us.	Call us toll free.	Visit one of our local field offices.

96-686
(02/01)