Texas Form 05-178 is the schedule you file with your annual franchise tax report to claim the Research and Development Activities Credit. The credit equals 5 percent of your current-year qualified research expenses performed in Texas above a base amount, and the form is the only way to capture it. The calculation is short, but it pulls numbers from your federal return and requires isolating the share of research spending that happened inside Texas.
Who Files Form 05-178
Any taxable entity that owes Texas franchise tax and incurred qualified research expenses in Texas during the report period can file this schedule to claim the credit. You attach it to the franchise tax report; it does not stand alone.
If you don’t already prepare federal Form 6765, you’ll need to work one up anyway, because the Texas calculation starts from a figure on that form. You use Form 6765 to total your qualified research expenses, then carve out the Texas-only portion for 05-178.1Internal Revenue Service. About Form 6765, Credit for Increasing Research Activities
What Counts as a Qualified Research Expense in Texas
Texas uses the federal definition of qualified research under Internal Revenue Code Section 41, but the state credit only covers the portion tied to research conducted in Texas. The Comptroller defines your Texas qualified research expenses as the amount on line 48 of IRS Form 6765 attributable to research performed within the state.2Texas Comptroller of Public Accounts. Subchapter T Franchise Tax Credit for Research and Development Activities
Three categories of spending feed that total:
- Wages paid to employees who directly perform, supervise, or support qualified research activities.
- Supplies, meaning tangible items consumed during research. Land, improvements to land, and property subject to depreciation don’t count.
- Contract research paid to outside parties. Only 65 percent of what you pay counts under federal rules, and that limit flows through to Texas.3Internal Revenue Service. Audit Techniques Guide: Credit for Increasing Research Activities IRC 41 – Qualified Research Expenses
If your company runs research in multiple states, keep clean workpapers showing how you separated Texas work from the rest. That allocation is yours to defend if the Comptroller asks.
How to Calculate the Credit
The formula has two moving parts: a base amount and a credit rate. The base amount trips up more filers than anything else on this form, because it is not simply last year’s spending.
Step 1: Figure the Base Amount
Your base amount is 50 percent of the average qualified research expenses you incurred during the three tax periods immediately before the current report period. Average the three prior years of Texas QREs, then take half.4State of Texas. Texas Tax Code Section 171.654
Without three full years of history, the statute adjusts. An entity in its first year of research uses zero as the base, so the full current-year QREs qualify. Before you have a three-year track record, average whatever prior periods you do have and apply the same 50 percent factor.
Step 2: Apply the Rate
Subtract the base amount from current-year Texas QREs. If the result is positive, multiply by 5 percent. That’s your credit.4State of Texas. Texas Tax Code Section 171.654
One exception raises the rate to 6.25 percent: if you contracted during the report period with a public or private institution of higher education for qualified research performed in Texas, the higher rate applies to the entire difference between current-year expenses and the base amount, not just the university-contracted slice.4State of Texas. Texas Tax Code Section 171.654
Worked Example
Say your Texas QREs for the past three years were $200,000, $250,000, and $300,000. The three-year average is $250,000. Half of that gives a base amount of $125,000. If current-year Texas QREs are $400,000, the excess over the base is $275,000. At 5 percent, your credit is $13,750. If part of that research was contracted with a Texas university, the 6.25 percent rate applies instead and the credit becomes $17,187.
Filling In the Form
Download the current version from the Texas Comptroller of Public Accounts.5Texas Comptroller of Public Accounts. Texas Franchise Tax Research and Development Activities Credits Schedule The top section asks for taxpayer name, taxpayer number, and report year. The body collects your current-year Texas QREs, the three prior years’ expenses, and walks the base-amount and credit math. Lines at the bottom combine any current-year credit with carryforwards from prior reports to produce total available credit.
A few things to get right:
- Match line 48 of federal Form 6765. Your starting figure for Texas QREs is pulled from that line, and the Comptroller expects consistency between the two filings.2Texas Comptroller of Public Accounts. Subchapter T Franchise Tax Credit for Research and Development Activities
- Enter Texas-only spending. Research performed outside Texas does not belong on this form, even if it sits in your federal QRE total.
- Use the current form year. Older versions can cause processing delays.
- Keep carryforward amounts on the dedicated line. Don’t fold them into your current-year calculation.5Texas Comptroller of Public Accounts. Texas Franchise Tax Research and Development Activities Credits Schedule
How and When to File
Form 05-178 is submitted as part of your franchise tax report package, not on its own. The companion forms depend on your entity type:
- Corporations, LLCs, and limited partnerships file Form 05-102, the Public Information Report.6Texas Comptroller of Public Accounts. Texas Franchise Tax Public Information Report and Ownership Information Report
- Other taxable entities, including general partnerships, trusts, and business associations not organized as corporations, LLCs, or limited partnerships, file Form 05-167, the Ownership Information Report.6Texas Comptroller of Public Accounts. Texas Franchise Tax Public Information Report and Ownership Information Report
The Comptroller’s Webfile portal is the primary way to submit electronically. You enter data directly, the system runs basic validation, and after you sign the return digitally the portal returns a confirmation number. Hold onto that number as proof of timely filing. Entities that qualify for paper filing mail completed forms to the Comptroller in Austin.
The franchise tax report, including Form 05-178, is due on May 15 each year. If May 15 falls on a weekend or holiday, the deadline shifts to the next business day. Extensions are available for the return, but any tax owed is still due on the original date.
How Much of the Credit You Can Use
Two limits control how much credit you can actually apply in a given year.
First, the total R&D credit used on a given report cannot exceed 50 percent of the franchise tax due before other credits. If your calculated credit is $20,000 but your franchise tax liability is $30,000, only $15,000 of credit comes off that report.7Texas Comptroller of Public Accounts. 202301007M – Section: Analysis
Second, any amount you can’t use because of the 50 percent cap, or because it simply exceeds your liability, carries forward for up to 20 report years. The 50 percent cap applies again in each year you draw against the carryforward, so a large accumulated credit can take several reports to absorb. Track the vintage of each year’s unused credit separately, because the 20-year clock runs from the year the credit was originally earned, not the year you start using it.7Texas Comptroller of Public Accounts. 202301007M – Section: Analysis
Records to Keep
If the Comptroller audits your R&D credit claim, the burden of proof is on you. Hold these records for as long as any credit from that year is still on your books, whether you used it in the year earned or are carrying it forward:
- Payroll records: time sheets, project assignments, and pay stubs for employees whose wages fed the QRE calculation.
- Supply invoices and purchase records for materials consumed during research.
- Contract documentation: agreements with third-party researchers or universities, with invoices and proof of payment.
- A copy of filed federal Form 6765 and the backup showing how you arrived at line 48.
- Texas allocation workpapers showing how you separated Texas-conducted research from research done elsewhere.
Because the carryforward runs up to 20 years, your documentation obligation can stretch across more than two decades. Businesses that let records lapse mid-carryforward risk losing the remaining credit if audited.