Posted by William Mehi on 09.11.24

Does your Pennsylvania business engage in research and development (R&D) activities? If so, you could qualify for significant tax savings through the Pennsylvania R&D tax credit program. Contrary to popular belief, the tax credit applies to far more activities than are typically associated with R&D.

Think of it this way: The intent behind the R&D tax credit program is to encourage innovation; where it takes place doesn’t matter as much. The U.S. Tax Court and other courts have ruled in favor of activities that make things faster, better, greener and more efficient.

The permanent extension of the federal R&D tax credit program through the Protecting Americans from Tax Hikes (PATH) Act of 2015 is a good reminder that there are also valuable state credits available to businesses for qualifying activities. Today, over 40 states, including Pennsylvania, offer their own R&D tax credits with attractive features and additional advantages.

See our blog: PATH Widens for R&D Tax Credit Opportunities

The Pennsylvania R&D Tax Credit

Administered by the Pennsylvania Department of Revenue, the state’s R&D tax credits are available to businesses incurring qualified expenses for R&D within the state of Pennsylvania. Qualified businesses, including pass-through entities, can apply the tax credit against personal income tax or the corporate net income tax liability.

Qualified expenditures may include:

• Wages for qualified services
• R&D supplies
• Payments for research to qualified organizations

While the Pennsylvania research credit is similar to the federal R&D credit in terms of determining which activities qualify for the credit, there are some differences, including:

• Pennsylvania has a pool of research credits available, currently set at $55 million. Of that amount, $11 million is reserved for small businesses
• The state’s credit rate for companies with assets over $5 million is 10%; for qualified small businesses with assets under $5 million, the credit rate is 20%
• The taxpayer must have qualified research expenses (QREs) in at least one preceding tax year
• Unused research credits may be carried forward for 15 years
• The Pennsylvania tax credit may not be carried back and is not refundable
• The credit is transferrable and “sellable”
• Expenditures incurred in a Keystone Opportunity Zone (KOZ) are not eligible for the Pennsylvania R&D tax credit. 

Request a free assessment to determine qualifying R&D tax credit eligibility

Tax Credit Transfers

The Pennsylvania R&D tax credit can also be sold or assigned with the approval of the Department of Community and Economic Development. The purchaser or assignee must use the credit in the taxable year in which the purchase or assignment is made, and the credit cannot exceed more than 75 percent of the tax liability for the taxable year. Also, the purchases or assignee may not carry over, carry forward, carry back or obtain a refund of the credit.

Pass-Through Rules

If a pass-through entity earning a R&D tax credit does not have sufficient tax liability to use the credit, it may elect (in writing) to transfer all or a portion of such credit to its shareholders, members or partners in their proportion share. The credits must be claimed in the taxable year in which it was transferred, and cannot be carried forward, carried back, refunded, sold or assigned. Additionally, a pass-through entity and a shareholder, member or partner of a pass-through entity may not claim a credit for the same qualified research and development expense.

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. To learn more about whether your industry and company activities qualify for the R&D tax credit, call (800) 260-4138 or please leave us a message below.