United States

Virginia R&D tax credit due date extended and “major” R&D form added

INSIGHT ARTICLE  | 

In 2016, Virginia implemented legislation for the state R&D tax credit to increase both the annual credit cap and maximum credit amount taxpayers may claim, allowing taxpayers to elect a different computation method (alternative simplified method), and provides a major research and development tax credit. To administer these significant changes, Virginia recently released the updated 2016 Form RDC and new Form MRD, which each include the new alternative simplified method calculation as well as an extended due date of July 1  from the previous April 1 due date, effective for taxable years beginning on or after January 1, 2016.

Virginia taxpayers should consider the July 1 Form RDC (or Form MRD) due date when determining whether to request an extension to file their Virginia income tax return. The Virginia Department of Revenue will issue the R&D allowable credit notification by September 30. Taxpayers that do not receive the notification of their allowable credit amount before the due date for their Virginia income tax return have two choices:

  1. File during the extension period, or
  2. File their income tax return without the Form RDC (or Form MRD) and then file an amended return upon receipt of the taxpayer’s allowable credit.

Taxpayers should note that filing for an extension might trigger a requirement to submit an extension payment for any taxes due.

Two options are available for taxpayers to calculate the Virginia R&D tax credit.  The first option is the primary credit calculation method.  This method requires taxpayers to compare current year qualified research expenditures (QREs) to a Virginia base amount.  The base amount is computed by multiplying the average of gross receipts for the prior four taxable years by a fixed base percentage (QREs for prior three years divided by average gross receipts for the prior three years).   

Effective for tax year 2016, taxpayers may elect to compute the credit under a new, alternative computation listed on Form RDC (and Form MRD).  The alternative simplified method provides a refundable credit equal to 10 percent of the Virginia QREs for the taxable year that exceed 50 percent of the average Virginia QREs paid or incurred by the taxpayer for the three taxable years immediately preceding the tax year of the credit claim. 

Under both methods, taxpayers are limited to a maximum $45,000 credit (or $60,000 if R&D is conducted in conjunction with a Virginia college or university).

Taxpayers with major research and development expenses (defined as Virginia qualified R&D expenses in excess of $5 million) should note that they are only eligible to claim a nonrefundable credit computed the same as the alternative simplified computation described above by filing Form MRD by July 1st (called the Major Research and Development Tax Credit). This calculation does not provide a limitation on the amount of credits allowed to the taxpayer. Beginning with fiscal year 2017, the Department of Taxation may grant up to $20 million in tax credits each fiscal year.  In addition, the new credit will be limited to 75 percent of the taxpayer’s Virginia income tax liability for the year. Unused credits may be carried forward for 10 years and applied against the taxpayer’s income tax liability.  

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