Virginia Bolsters Research and Development Tax Credit

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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.


About Michael Colavito, Jr.

Michael Colavito, Jr. has written 55 post in this blog.

Michael L. Colavito, Jr. is a senior manager in Aronson LLC’s Tax Services Group, where he provides multi-state taxation services pertaining to income, franchise, sales and use, and property taxes. Michael’s experience also includes representing clients at all stages of tax controversy, from audit through appellate litigation, and advising them on restructurings, state tax refund and planning opportunities.

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