Incentives Watch: Knowing Your State R&D Credits


Tax credits for research and development are some of the most popular credits available. A majority of states, and the federal government, offer a research and development tax credit. The federal credit for increasing research activities under I.R.C. §41 serves as the template for many of the state tax credits for research and development. Even so, many state credits have different credit limitations and amounts, as well as varying sunset dates and other important provisions. Two of these states, Delaware and Virginia, have also recently made revisions to their credit.

In Delaware, S.B. 200 has made significant amendments to the state’s research and development tax credit. These changes to the research and development credit, as well as changes made to other Delaware tax credits, were made as a result of a merger between DuPont Co. and Dow Chemical Co., as reported by Leslie A. Pappas in Bloomberg BNA’s Weekly State Tax Report.

Previously in Delaware, the aggregate credit limit per fiscal year was $5 million, and no one credit was permitted to exceed 50 percent of a taxpayer’s tax liability. However, for qualified research expenses beginning Jan. 1, 2017, both limitations have been removed. In addition, the credit has become refundable.  

Meanwhile, H.B. 884 has extended the credit’s sunset date in Virginia from Jan. 1, 2019, to Jan. 1, 2022, as reported by Andrew M. Ballard in Bloomberg BNA’s Weekly State Tax Report. The bill also increased the limitation on both the qualified expenditures eligible for the credit and the aggregate credit limit per fiscal year. Taxpayers are now permitted to claim a credit for up to $300,000 of qualified research expenditures, the article states.

The $300,000 expenditure limit aside, taxpayers with a bit more qualified research expenses may have no need to fret. As part of H.B. 884, Virginia implemented a major research and development expense credit for taxpayers with qualified research expenditures in excess of $5 million, according to the article. Taxpayers may not, however, claim both the research and development credit and the major research expense credit.

Virginia also offers an alternative calculation for their research and development tax credit beginning Jan. 1, 2016. This alternative calculation equals 10 percent of the difference between the taxpayer’s qualified research and development expenses and 50 percent of the average qualified research and development expenses paid or incurred by the taxpayer during the three taxable years immediately before the taxable year in which the credit is being claimed. The alternative calculation was added to the credit as part of S.B. 58.

The recent legislation in Virginia and Delaware highlight the importance of knowing the differences that make up this popular credit in each taxing jurisdiction.

For a discussion of the various state research and development tax credit, and the federal tax credit for increasing research activities, sign up for a free copy of Bloomberg BNA’s Research and Development Tax Credit Practice Tool at go.bloombergbna.com/rd-credits-tool

*Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: What is the most significant difference between your state’s research and development tax credit and the federal credit under I.R.C. §41?

For more information about tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.