Virginia Bolsters Research and Development Tax Credit – Virginia has enacted legislation increasing the Commonwealth’s income tax credits for Research and Development (R&D) activities. The legislation (SB 58), which passed both the Virginia Senate and House by unanimous vote, extends the sunset date of the program, increases the amount of the existing R&D credits, and creates an additional credit for “major research and development expenses.”
The last year for Virginia’s R&D credits was scheduled to be tax year 2018, but SB 58 has extended the program through tax year 2021. The legislation also increases the cap on the amount of R&D credits that may be granted by the Department of Taxation from $6 million to $7 million. With respect to the credits that a taxpayer can claim each year, the bill increases the tax credit from 15% of the first $234,000 of a business’s Virginia qualified R&D expenses to 15% of the first $300,000 of such expenses. Thus, the maximum credit for a taxpayer has been increased from $35,100 to $45,000, an increase of $9,900. Virginia’s R&D credit for qualified R&D expenses conducted in conjunction with a Virginia public or private college or university has also increased from $46,800 to $60,000.
Further, the legislation also creates a new R&D tax credit beginning with taxable year 2016 for businesses with major research and development expenses. The Department is authorized to grant up to $20 million in major R&D tax credits each fiscal year. The new credit applies to taxpayers with Virginia R&D expenses in excess of $5 million for the taxable year. The major R&D expense credit is a credit of 10% of the difference between a taxpayer’s taxable year Virginia R&D expenses less 50% of the average Virginia R&D expenses incurred by the taxpayer in the prior three years. For taxpayers that did not incur Virginia R&D expenses in any of the three prior years, the major R&D credit is 5% of the taxable year’s Virginia R&D expenses.
Unlike the regular R&D credit discussed above, which is a refundable credit, the major R&D expense credit is limited to 75% of the taxpayer’s Virginia income tax liability for the year. However, any unused portion of the credit may be carried forward for 10 years. It’s important to note that a taxpayer claiming the major R&D expense credit cannot claim the normal R&D credit.
Maryland is also contemplating enhancing its R&D credit. Legislation being considered by the Maryland General Assembly would increase the annual cap on R&D credits from $9 million to $20 million over the next three years. This would represent a marked improvement in Maryland’s program, which under the current structure, has resulted in taxpayers only receiving a small portion of the credit that they claimed.
If you have questions about state tax credit, please call you Aronson Tax Advisor or Michael L. Colavito, Jr. at 301-231-6200.