Massachusetts S Corps cut tax expense with R&D tax credits

Posted by Jeffrey M. Feingold on 01.30.14

Massachusetts S Corps are taxed at the entity level if their gross receipts exceed $6 million. The tax, which ranges from 3% - 4.5%, can be offset by claiming the Massachusetts state R&D tax credit for qualifying companies.

Who qualifies?

Massachusetts has followed the federal government in implementing R&D tax credits to businesses who are doing R&D work in order to create jobs and stimulate the economy. This definition of who qualifies has been expanded to include development of processes, techniques, formulas, products, and computer software. Now companies can qualify that are using a new process or technique that they never used before, even if it is not new to the industry. This allows room for most businesses to claim deductions even though they don't think of themselves as R&D businesses. It is well worth talking to a tax professional who offers a free consultation to see if your company can qualify for this deduction and save thousands of dollars on this year's taxes. 

Massachusetts R&D tax credits

The state of Massachusetts allows a qualified "business enterprise" to claim a state R&D credit for qualified research expenses ("QREs") incurred in Massachusetts. This "business enterprise" may be a corporation, a partnership, a mom and pop shop, or an individual who is developing a new product or process. This R&D tax credit is in two parts:

  1. A 10% credit is available for Qualified Expenses which are defined as any research expense which would qualify for the Federal R&D tax credit.
  2. A 15% credit is available for Basic Research Payments. This credit is available for any costs related to donations and contributions made to research organizations like hospitals or universities.

Who qualifies for the tax credits?

Lots of industries qualify. Those making new products qualify, but so do others who are trying new ways of manufacturing or installing that they haven't used before. Even if everyone else in their field is using this method, if it is new to them, it could qualify. The state qualification points are:

  1. The company did "qualified research" in Massachusetts.
  2. The company incurred expenses while doing this research.
  3. The expenses occurred after Jan. 1, 1991.
  4. Both domestic and foreign companies qualify.
  5. The company must be eligible for research credit from the federal government for the tax year.

Unique features of the Massachusetts R&D tax credit

The Massachusetts R&D tax credit is very much like the federal credit program; however, it especially offers qualifying Massachusetts companies these distinctive advantages for doing business in Massachusetts:

  • While other states have the R&D tax credit as temporary with options of renewing it, the Massachusetts credit is permanent. This shows the state's commitment to the future of R&D in its borders.
  • The state R&D tax credit can be taken in addition to the state's Investment Tax Credit of 3% (or 5% as part of the Economic Development Incentive Program).
  • The R&D tax credit may reduce the corporation's tax to the minimum tax of $456.

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