Simplified Massachusetts R&D Tax Credit

Simplified Massachusetts R&D Tax Credit

Posted by Jeffrey Feingold on 11.19.20

Before leaving office at the end of 2015, former Massachusetts Gov. Deval Patrick approved legislation which included positive revisions to the Massachusetts research and development (R&D) tax credit. The new legislation incorporated two key calculation changes including a version of an alternative simplified research credit which mirrors the Federal ASC calculation rules that have been in place since 2007. Starting in 2015, Massachusetts companies can now calculate their Massachusetts research credit using this new simplified method, opening up opportunities to companies that did not meet documentation requirements previously or were obligated to use the maximum amount of 16% per code section 830 CMR 63.38M.1(5)(a)1. First introduced in the 1980s, the state’s R&D credit closely followed the federal R&D tax credit program, which was made permanent in 2015. The Massachusetts credit, which was already permanent, applied to qualified research expenses incurred in the state.

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

Complex R&D Tax Credit Calculations

There were two different ways that the fixed base percentage could be calculated before Jan. 1, 2015, one of which depended on how long the taxpaying entity existed. One of the cumbersome calculations required a taxpayer in existence before 1983 to their aggregate QREs and gross receipt information between 1984 and 1988 to establish the fixed base percentage. If records were not available, companies were obligated to use the maximum base period amount of 16%. Taxpayers coming into existence during or after this time were required to use a fixed-base percentage of 3%. Starting in 2015, new legislation also changes the regular credit rules for the state of Massachusetts by replacing the fixed base percentage with a new fixed base ratio amount. The fixed base ratio is determined by taking the total of the taxpayer’s qualified research expenses for the 3rd and 4th prior taxable years and dividing by the taxpayer’s gross receipts over the same two taxable years, not to exceed 16%. Needless to say, the complexity of these calculations, when to use each calculation method, and recordkeeping requirements kept many Massachusetts businesses eligible for the state tax credit from accurately claiming the tax credit.

Simplified Approach

Unlike the Massachusetts credit, the federal credit offered an alternative incremental credit which was eventually replaced with the alternative simplified credit. The alternative simplified credit broadens the field of who can apply for and claim the federal R&D tax credit. The intent was to include taxpayers with high gross receipts, flat or declining QREs, as well as taxpayers who had difficulty with maintaining records required by the traditional regular credit. The Massachusetts reforms to the state R&D credit followed this same approach. The 2015 revisions to the Massachusetts R&D tax credit accomplished several things:

  • Simplified the traditional research credit calculation by changing the fixed base percentage to a fixed base ratio
  • Offered companies the ability to use and ASC calculation for their MA credit
  • Broadened the application among taxpayers

Benefits to Massachusetts Businesses

For tax years beginning on or after Jan. 1, 2015, the fixed-base percentage calculation no longer depends on 1980s data, or the taxpayer’s first years of existence. Now, the fixed-base percentage is calculated on a rolling basis that is based on the aggregate QREs over the average gross receipts for the third and fourth taxable years before the year the credit is claimed. The recordkeeping requirement is much more manageable, and those taxpayers who once unqualified for the credit may now qualify. One of the more significant benefits is that taxpayers may choose to claim the R&D credit by using the alternative simplified method. What does this mean? This approach is being phased-in in three stages between 2015 and 2017:

  • 2015-2017: The credit will be equal to 5% of the taxpayer’s QREs in excess of 50% of the average QREs for the preceding three years
  • 2018-2020: The credit will be equal to 7.5% in excess of the base amount
  • 2021: With the full phase-in, the credit will be equal to 10%
  • Taxpayers with no QREs in any of the three preceding years will be granted a credit of 5% of all QREs for the current year

Taxpayers claiming the credit should conduct an analysis using both calculations to decide which is the most beneficial for each year. Tax Point Advisors offers expertise in helping companies determine the best approach to state and federal R&D tax credits.

Find Out if Your Activities Qualify

The R&D tax credit can be a lucrative incentive for innovative businesses. Given the new permanent nature of the tax credit, now is the time to consider whether activities performed by your company qualify for major cash-saving tax credit opportunities.

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

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, please contact (800) 260-4138 or please leave us a message below.

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