For decades, qualifying U.S. businesses missed out on the research and development tax program's lucrative benefits. While some organizations didn't know the program existed, many simply assumed that their operations didn't qualify for the dollar-for-dollar tax reduction due to their enterprises' size or industry. As a result, companies missed out on millions of dollars in earned tax credits each year.
The PATH Act of 2015 made the R&D tax credit a permanent program beginning after December 31, 2015. The permanency of the innovation tax credit, coupled with its new legislation, has helped the program gain both recognition and momentum with business owners across multiple qualifying industries. Still, while a growing number of entrepreneurs understand the program's federal-level benefits, many don't realize they may also qualify for state credits.
Many Business Owners Still Don't Realize the R&D Tax Credit Offers State-Level Benefits
If your organization has claimed or qualifies for the federal R&D tax credits, it's essential to know if you're also eligible for state credits to optimize overall working capital for your organization. Some critical factors to consider on the state level include:
While most U.S. states offer some version of an R&D tax credit, it's important to remember that it's not available in every state. Currently, 35 states allow innovation-centric organizations an opportunity to increase their profit margins and drive local economic growth. The states that do not recognize research and development credits are:
- South Dakota
- North Carolina
Your business type may also impact whether you qualify for state-level R&D tax credits. Typically, participating states consider Partnerships, C-Corporations, S-Corporations, and LLCs as eligible entities. However, every state can adjust the qualifications of its specific program. For example, in Massachusetts, businesses must be registered as either a C-Corporation or an S-Corporation to file for the state benefits. Other states, such as Connecticut, Rhode Island, and Florida, only allow C-Corporations to file for the credits.
Like the various federal computation tactics, states also have multiple ways to compute their designated research and development credit. Typically, on the local levels, businesses will determine their credit in one of two ways:
- Compare qualified research expenditures (QREs) to those of a base period
- Compare QREs to gross receipts
Location of Qualified Research Expenditures (QRE)
It's important for larger enterprises to note that most states require that the QREs incur within its borders to be eligible for that state's research and development benefits. Companies with operations in multiple locations will have to determine where the expense is sustained. For example, a business with California and Arizona facilities that both perform QREs has to identify the total QREs in each operation and apply that state's credit computation to determine the final benefit.
Not all participating states recognize carryforward credits. Additionally, the locations that do acknowledge carryforward credits utilize varying timeframes that range from 3 years to an indefinite period.
When filling for research and development credits at the state level, it's important to know what's required. Several states permit qualifying taxpayers to claim the local credits by completing and filing a state form with their income tax return. However, other locations have a more formal application process. For example, the state of Pennsylvania requires taxpayers to apply for the credit before a designated application deadline.
And, speaking of deadlines, typically, local legislation requires qualifying entities to file for the research and development tax credit when filing their state tax returns. However, this isn't a universal rule. Some states, including New Hampshire, Maryland, and Virginia, have different R&D filing deadlines than the state tax return date.
Acena Consulting: Experts in Federal and State R&D Tax Credits
Acena Consulting helps business owners optimize research and development tax credits on both a local and federal level. Schedule a consultation with our team today to learn more. Be sure to download our state-by-state guide below for more information on the legislation in your region.