By Jason Jones
Key Takeaways
- Individuals and businesses that engage in qualified research and development activities in Virginia or Maryland can receive a Research & Development Tax Credit.
- Eligibility for individuals and companies seeking the Virginia or Maryland R&D Tax Credits is determined similarly to eligibility for the Federal R&D Tax Credit.
- The application deadline for the Virginia R&D Tax Credits is September 1. The application deadline for the Maryland R&D Tax Credits is November 15.
Like many states, Virginia and Maryland offer R & R&D Tax Credit opportunities – what makes them different is the potential for the credit to be refundable. This presents an excellent opportunity for small businesses, who are still in their early stages and not incurring a significant income tax opportunity, to take advantage of these credits. Both Virginia and the Maryland R&D Tax Credits are similar in that they rely on the Federal R&D Tax Credit to determine eligibility, but each has some nuances that are discussed below.
Virginia R&D Tax Credit
Virginia has two separate R&D Tax Credit opportunities available to companies and individuals who incur research and development expenses in the Commonwealth of Virginia. The Virginia Refundable R&D Tax Credit is open to individuals and companies with $5 million or less in qualified research and development expenses. For individuals and companies with more than $5 million in qualified research and development expenses, they have the opportunity to apply for the Virginia Major Research and Development Tax Credit.
Virginia Refundable R&D Tax Credit
Individuals and companies with $5 million or less in qualified research expenses are able, each year, to apply for an R&D Tax Credit up to 15% of the first $300,000 in qualified fees that are more than the Base Amount, or, up to 20% of the first $300,000 in qualified expenses that are in excess of the Base Amount if the research was conducted in conjunction with a Virginia public or private college or university.
This credit can be claimed against either Virginia individual or corporate income tax obligations and is refundable to the extent the credit is larger than the income tax obligation of the taxpayer.
The Virginia Refundable R&D Tax Credit, however, does have a cap. Virginia has allocated $7 million for the Virginia Refundable R&D Tax Credit. If applications exceed the $7 million cap, the credits will be issued pro-rata. In prior years, taxpayers who have applied for the maximum R&D Tax Credit of $45,000 have been awarded approximately 45% of their application amount.
Eligibility for individuals and companies seeking the Virginia Refundable R&D Tax Credit is determined in the same manner as eligibility for the Federal R & R&D Tax Credit – that is, whether the expenses qualify as defined is §41 of the Internal Revenue Code. Additionally, the costs must be related to research conducted in Virginia.
The Virginia Refundable R&D Tax Credit application is due September 1, and award letters certifying the credit are sent by November 30. Upon receiving the certificate, the taxpayer can amend their tax return for the year they are claiming the Virginia Refundable R&D Tax Credit to claim the credit.
For a quick example, I’ll reference a Software Development client we worked with last year. In 2019, they had the following expenses:
- Qualified R&D Wages – $2,460,040
- Qualified Contract Research Expenses – $743,15
- Total Qualified Expenses – $3,203,185
Their expenses above their base amount end up being $1,601,593. However, Virginia caps the fees at $300,000. Multiplying the $300,000 by 15%, we arrive at the maximum application amount of $45,000. In 2019, companies were being awarded roughly 47% of their application amount resulting in an award of approximately $21,150 which can either be applied towards Virginia income tax liability or is fully refundable.
Virginia Major R&D Tax Credit
Individuals and companies with more than $5 million in qualified research expenses can apply, each year, for an R&D Tax Credit equal to 10% of the difference between this year’s qualifying expenses and a base amount equal to 50% of the average amount of qualifying expenses for the prior three years. Taxpayers who do not have qualifying expenses in any one of the last three years can apply for a credit equal to 5% of the expenses paid in the tax year for which they are applying.
The Virginia Major R&D Tax Credit is not refundable; however, this credit can be claimed against up to 75% of the taxpayer’s Virginia income tax obligations. Any excess or unused credit can be carried forward for ten years.
The Virginia Major R&D Tax Credit, however, does have a cap. Virginia has allocated $24 million for the Virginia Refundable R&D Tax Credit. If applications exceed the $24 million cap, the credits will be allocated pro-rata.
Eligibility for individuals and companies seeking the Virginia Major R&D Tax Credit is determined in the same manner as eligibility for the Federal R&D Tax Credit – that is, whether the expenses qualify as that is defined is §41 of the Internal Revenue Code. Additionally, the costs must be related to research conducted in Virginia.
The application for the Virginia Major R&D Tax Credit is due September 1, and award letters certifying the credit are sent by November 30. Upon receiving the certificate, the taxpayer can amend their tax return for the year they are claiming the Virginia Major R&D Tax Credit to claim the credit.
Maryland R&D Tax Credit
Maryland has two separate R&D Tax Credit opportunities available to businesses that incur research and development expenses in the state of Maryland.
The Maryland Basic R&D Tax Credit equals 3% of the qualifying expenses that do not exceed the Maryland Base Amount. The Maryland Growth R&D Tax Credit equals 10% of the qualifying expenses that exceed the Maryland Base Amount.
The Maryland Basic R&D Tax Credit and the Maryland Growth R&D Tax Credit are subject to a $5.5 million cap. If the applications for each credit exceed the cap for those credits, the credits will be allocated on a pro-rata basis.
Eligibility for individuals and companies seeking the Maryland R&D Tax Credits are determined in the same manner as eligibility for the Federal R&D Tax Credit – that is, whether the expenses qualify as defined is §41 of the Internal Revenue Code. Additionally, the costs must be related to research conducted in Maryland.
Both the Maryland Basic R&D Tax Credit and the Maryland Growth R&D Tax Credit are refundable for qualified small businesses. To qualify as a small business for purposes of the Maryland R&D Tax Credits, the company must have qualified research and development expenses that do not exceed $5 million. Furthermore, eligible small businesses must submit their application documentation that shows they have a netbook value of less than $5 million.
The application for the Maryland Basic R&D Tax Credit and the Maryland Growth R&D Tax Credit is due November 15. Award letters certifying the credits are sent the following February 15. Upon receiving the certificate, the taxpayer can amend their tax return for the year in which they are claiming the Maryland R&D Tax Credits to claim the credit.
Conclusion
Both Virginia and Maryland present great opportunities for businesses to receive an R&D Tax Credit for qualifying expenses. Tri-Merit Specialty Tax Services has extensive experience working with companies to leverage this opportunity. If you or your clients have questions about qualifying for Virginia or Maryland R&D tax credits, don’t hesitate to contact us.
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R&D tax credit | Cost segregation | 179D | 45L | Employee Retention Credit
Jason Jones is a Director and General Counsel at Tri-Merit, a professional services firm specializing in the calculation, documentation, and substantiation of R&D tax credits and other specialty tax services for companies of all sizes and across all industries. The firm’s partners conduct training at CPA firms across the country and often speak at accounting industry trade shows and conferences to help educate the profession. Contact Jason at jason.jones@tri-merit.com or 847 637 5677 x135.
