Running a business often requires coming up with new products, technologies, or systems. Innovations and new ideas do not come cheap and often require extensive hours of research and development, many times with little to no return on investment in the beginning. The Research and Development Tax Credit, or R&D tax credit, aims to help companies with these costs by allowing certain businesses to deduct qualifying research and development expenses from their taxable income.
R&D tax credits are available at the U.S. Federal Level and U.S. state levels. The Federal R&D tax credit is outlined under Section 41 of the Internal Revenue Code. The credit was first enacted by the IRS in 1981 as a way to encourage innovation and development within the United States.
Who Qualifies for an R&D Tax Credit?
In order to see if your business qualifies, read more about the R&D tax credit requirements. Some of the industries that may be eligible for the R&D tax credit include:
● Life Sciences
● Food Sciences
● Aerospace and Defense
● Robotics and 3D Printing
● Software and Electronics
● Cryptocurrency, Online Banking, and Brokerage Platforms
● Architectural and Engineering Firms.
The IRS has a four-part test to determine if you are eligible for R&D tax credits. Your business activity must:
● Be Technological in Nature: Performing activities that fundamentally rely on the principles of physical or biological science, engineering, or computer science.
● Have Permitted Purpose: Performing activities with a goal of improving the functionality, performance, reliability, or quality of a new or existing product or business element.
● Eliminate Uncertainty: Performing activities meant to find out information that could decrease technical uncertainty regarding the development or improvement of a product or business element.
● Provide Experimentation: All activities performed must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.
Existing R&D Credits by State
There are currently several U.S. states that offer an R&D tax incentive. Below is a brief analysis of the research and development credit available in these states.
● Arizona offers both a refundable and non-refundable tax credit for qualifying research within the state, including research funded by taxpayers at certain state universities.
● Arkansas has an R&D credit under The Consolidated Incentives Act of 2003 for research costs incurred within the state.
● The California credit has several state-specific guidelines including, but not limited to, the speculation that all research must be conducted within the state of California.
● Colorado offers a credit for taxpayers who make “expenditures in research and experimental activities” as defined in IRC Section 174.
● Connecticut allows C Corporations to claim incremental and non-incremental R&D credits.
● The Delaware credit is based on the federal R&D tax credit as provided under IRC Section 41.
● In Florida, only qualified businesses in the following industries may be eligible: manufacturing, life sciences, information technology, aviation and aerospace, homeland security and defense, cloud information technology, marine sciences, materials science, and nanotechnology.
● A business that has qualified expenses exceeding a certain base amount is eligible for a tax credit in Georgia.
● In Hawaii, a business must be a “qualified high technology business” and must also claim a federal tax credit for the same qualifying research activities.
● There is a tax credit available in Idaho for companies that perform research activities within the state.
● The Illinois research credit is very similar to the federal R&D credit, including the definition provided for qualifying research, with some differences.
● Indiana offers two alternative credits: a research expense credit and an alternative qualified research expense credit for aerospace contractors.
● Iowa offers the Iowa Research Activities Tax Credit, which is based on the same rules governing the federal tax credit and offers businesses two methods for calculating their credit.
● In Kansas, a nonrefundable income tax credit is offered to a taxpayer who makes expenditures in R&D activities within the state.
● Kentucky offers a tax credit equal to 5% against the corporate or personal income and the limited liability entity tax for research facilities qualified construction costs.
● In Louisiana, qualified businesses can be eligible for up to a 30% tax credit on qualified expenditures incurred within the state with no cap and no minimum requirement.
● Maine offers two credits: the research expense tax credit and the super research and development credit.
● Maryland also offers two credits: the basic credit and the growth credit.
● The Massachusetts credit closely parallels the federal R&D tax credit, with some differences.
● In Minnesota, a tax credit is available to businesses, partnerships, and S corporations with qualifying research activities.
● The Mississippi R&D tax credit offers $1,000 for any new full-time employee in any job requiring research and development.
● Under the Nebraska Advantage Research and Development Act, a business that incurs research and experimental costs may claim a tax credit that is equal to 15% of the federal tax credit as allowed under Section 41 of the Internal Revenue Code.
● New Hampshire offers a credit to businesses and taxpayers who incur qualified manufacturing research and development costs.
● The tax credit in New Jersey is equal to 10% of the excess of qualified research expenses for the calendar year over a base amount, plus 10% of the basic research payments.
● New York offers an R&D tax credit based on qualified research as described under the Federal research credit and offers several other credits related to research and development.
● North Dakota offers an income tax credit for research conducted in North Dakota equal to a percentage of the excess of qualified research over a base amount.
● Ohio offers a non-refundable tax credit equaling 7% of the qualified expenses.
● The Pennsylvania tax credit is available to businesses and taxpayers performing qualifying research within the state and has guidelines very similar to the federal R&D tax credit.
● Rhode Island allows taxpayers who incur qualified research expenses within the state to claim an income tax credit.
● In South Carolina, taxpayers are eligible for an R&D Tax Credit equal to 5% of qualified research costs accrued in South Carolina but cannot exceed 50% of a taxpayer’s liability.
● Under Utah Code Section 59-10-101, taxpayers are offered a tax credit for qualifying research conducted within the state.
● Vermont offers an R&D credit equal to 27% for research and development expenditures made in Vermont.
● Virginia offers a refundable individual and corporate income tax credit for qualifying research and development, as long as the taxpayer’s expenses within Virginia exceed a base amount.
● Under Wisconsin legislation, a corporation may claim a research credit against the income or franchise tax.
Proposed R&D Tax Credit Bills in 2022
There were 197 bills proposed in the current sessions regarding R&D Tax credits, 30 of which had passed by Sept, 2022, including some which repealed certain credits. For a complete list see here or click the map below which shows which states introduced the most bills on this topic.
You can stay up to date on future credits with a free BillTrack50 account; register here.