Posted by Jeffrey Feingold on 02.15.23

CPAs and taxpayers familiar with the Federal R&D tax credit program may not be fully aware of the scope of state R&D credits available across the United States.  About forty states have their own R&D tax credit programs, with some as or even more valuable than the Federal credit program.  Unlike the Federal program, some of the state credits are refundable (refunds in excess of the amount of a taxpayer’s tax liability), some are transferable/salable by the taxpayer claiming the credits to other taxpayers in the same state, and still some are in states with attractive credit “buy back” opportunities.

Listed below are just a few of the interesting state R&D credit programs.

Florida

The Florida R&D tax credit reduces the income or franchise tax of those taxpayers who engage in qualified research activities in Florida. Qualified research expenses (QREs) generally include wages, supplies and contract research costs. 

• Only qualified target industry businesses in the manufacturing, life sciences, information technology, aviation, aerospace, homeland security and defense, cloud information technology, marine sciences, materials science, and nanotechnology industries may qualify for a tax credit. 
• A business applying for a credit shall include a letter from the Florida Department of Revenue (DOR) certifying whether the business meets the requirements of this subparagraph with its application for credit. The Florida Department of Revenue (DOR) shall provide such a letter upon receiving a request.
• The tax credit shall be 10 percent of the excess qualified research expenses over the base amount. However, the maximum tax credit for a business enterprise that has not been in existence for at least 4 taxable years immediately preceding the taxable year is reduced by 25 percent for each taxable year for which the business enterprise, or a predecessor corporation that was a business enterprise, did not exist.
• The credit taken in any taxable year may not exceed 50 percent of the business enterprise’s remaining net income tax liability after all other credits have been applied.
• Any unused credit may be carried forward and claimed by the taxpayer for up to 5 years.
• The combined total amount of tax credits which may be granted to all business enterprises in the 2018 calendar year is $16.5 million. 
• Applications may be filed with the department on or after March 20 and before March 27 for qualified research expenses incurred within the preceding calendar year. If the total credits for all applicants exceed the maximum amount allowed under this paragraph, the credits shall be allocated on a prorated basis.

To learn more about Florida’s R&D tax credits, see related blog here: http://taxpointadvisors.com/blog/view/state-rd-tax-credits-for-florida

New Jersey

The state of New Jersey, which offers a tax incentive for R&D investment for both manufacturers and R&D companies, allows a qualified business enterprise to claim a state R&D tax credit for qualified research expenses (QREs). A tax credit for increased research activities is allowed based on qualified expenditures made in taxable years beginning on and after Jan. 1, 1994. To receive a New Jersey R&D tax credit, the corporation must be allowed a research credit for the taxable year against federal income tax for qualified research expenses under s. 41, IRC. Click here to view federal forms (https://www.irs.gov/forms-instructions). The New Jersey R&D tax credit closely resembles the federal credit program; however, it specifically offers qualifying New Jersey companies many unique features for doing business in New Jersey.

For tax years beginning on and after January 1, 2018, the state of New Jersey adopted Assembly Bill 4202 which amends the state R&D tax credit to allow taxpayers to calculate their R&D Tax credit using the ASC (Alternative Simplified Credit) calculation. The changes introduced by this bill are prospective only and can not be adopted on amended returns for previous tax years. 

New Jersey provides a credit of 10% of the excess QREs over a base amount plus 10% of the basic research payments. The New Jersey R&D tax credit is allowed based on qualified expenditures made in taxable years beginning after 1993. If the research credit cannot be used because of tax liability limitations, it may be carried forward for either seven or 15 years as follows:

• Any unused R&D tax credits can be carried forward for seven years
• A taxpayer that has been allowed an R&D tax credit for the fiscal or calendar accounting period (tax year) in which the qualified research expenses have been incurred, and basic research payments have been made, for research conducted in New Jersey in the fields of advanced computing, advanced materials, biotechnology, electronic device technology, environmental technology and medical device technology, are allowed to carry forward the tax credit for 15 years

Property and expenditures included in the calculation of the R&D tax credit are not permitted to be included in the calculation of the following tax credits:

• Recycling Equipment Tax Credit
• Manufacturing Equipment
• Employment Investment Tax Credit
• New Jobs Investment Tax Credit

Ohio

With a longstanding reputation for leadership in aerospace, agriculture, healthcare and manufacturing, Ohio remains one of the nation’s most innovative states. To further encourage innovation, the state provides incentives for certain research and development (R&D) activities that bring new ideas to market, promote economic growth, create jobs and help keep Ohio competitive.

In 2008, the state of Ohio established the R&D Investment Tax Credit for qualified research expenses (QRE) to encourage Ohio's corporations to boost investments in R&D activities. The tax credit can be taken to offset the Commercial Activity Tax (CAT) liability. This enables innovative businesses to continue budgeting ahead for long-term R&D projects. 

There is no special application and/or approval process for the Ohio R&D credit. Using the federal definition to determine QREs, businesses should calculate their credit based on 7% of the excess of their current year expenditures over their average R&D expenditures for the three prior tax years.

Ohio credits not utilized year may be carried forward for 7 years. 

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

Pennsylvania

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. 
• In order to claim the 2018 PA R&D Tax Credit, applications must be submitted by June 1, 2019. 

Tax Point Advisors works with small to midsize businesses that may qualify for federal and state R&D tax credits nationwide. To learn more about whether your industry and company activities qualify for the R&D tax credits, call (800) 260-4138 or please leave us a message below.