Posted by Jeffrey Feingold on 05.24.17
The state of Rhode Island offers a tax credit for qualified research and development (R&D) expenses to C corporations. This is in addition to valuable federal R&D tax credits that were made permanent by the Protecting Americans from Tax Hikes Act of 2015 (PATH Act).
Rhode Island enjoys a wealth of strategic advantages for businesses engaged in research activities of all sizes and scopes. Its centralized presence in the Northeast U.S. provides easy access to key centers of national and international commerce. It enjoys the Northeast’s lowest corporate tax rate (7% as of 2015). Its renowned academic institutions, including Brown University, University of Rhode Island and the Rhode Island School of Design (RISD), are havens of innovation and serve as incubators for many innovative startups.
The state also ranks second nationwide in academic R&D dollars per capita, and it ranks first overall for total R&D expenditures per square foot of research space at academic institutions. All this and more adds up to a state with a small geographic footprint, and big opportunities for businesses engaged in research activities.
How the Rhode Island R&D Tax Credit Works
Since 1998, the Rhode Island R&D tax credit is 22.5% for excess research expenses incurred in Rhode Island up to $111,111 and 16.9% for the remaining expenses over $111,111.
The credit is based on the amount of the taxpayer's federal excess expenses and is calculated by first determining what of the taxpayer's federal excess expenses were incurred in Rhode Island.
Taxpayer A has completed and claimed its Federal Section 41 credit and has calculated qualified research expenses of $100,000 towards its federal research credit. If its Federal Section 41 base amount has been calculated out as $75,000 and all expenses were incurred in Rhode Island after January 1, 1998, then Taxpayer A’s Rhode Island R&D expense credit is calculated as:
Federal qualified research expenses: $100,000
Federal base amount: $75,000
Federal excess expenses: $25,000
Amount of federal excess expenses in Rhode Island: $25,000
Amount of expenses in Rhode Island after January 1, 1998: $25,000
Credit @22.5%: $5,625
Additional Rhode Island R&D Tax Incentives
Besides the state’s R&D tax credit, four other significant incentives are available to Rhode Island businesses. A brief explanation of each follows.
R&D Property Credit
Under this incentive, a corporation is allowed a 10% tax credit for expenditures paid or incurred for the construction, reconstruction or acquisition of any property which is principally used or to be used for R&D in the experimental or laboratory sense. Leased property is not eligible. The property must be depreciable and have a useful life of three years or more. Unused credit may be carried forward for up to seven years.
Elective Deduction for R&D Facilities
In lieu of depreciation or the investment tax credit, a corporation is allowed a one year write-off for expenditures paid or incurred during the taxable year for the construction, reconstruction or acquisition of all qualifying depreciable tangible property, including buildings, which is used or to be used for the purpose of research and development in the experimental or laboratory sense. The deduction is allowed under the corporate income tax.
R&D Sales Tax Exemption
This exemption permits taxpayers to avoid paying sales tax on certain property used for qualified research.
Innovation Tax Credit
Rhode Island offers a tax credit to encourage investment in high-growth, high-wage innovation industries. The Innovation Tax Credit offers investors up to a 50% credit on eligible investments, with a maximum tax credit of $100,000. This tax credit cannot be taken against a taxpayer’s personal income tax.
Find Out if Your Activities Qualify
The R&D tax credit can be a lucrative incentive for Rhode Island businesses. And given the new permanent nature of the federal tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving federal and state tax credit opportunities.
Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, read our e-book: The Business Owner's Guide to R&D Tax Credits.
You may also contact us at (800) 260-4138, or please leave us a message below.