Virginia research and development tax credit improved by new legislation
TAX ALERT |
Virginia Governor Terry McAuliffe recently signed legislation increasing the Virginia income tax credits for Research and Development (R&D) activities. The legislation (S.B. 58) extends the sunset date of the program through tax year 2021, increases both the annual credit cap and maximum credit amount taxpayers may claim, allows taxpayers to elect a different computation method, and creates a new type of R&D tax credit.
The legislation increases the cap on the amount of annual R&D credits that may be granted from $6 million to $7 million. The amount of credits each taxpayer may claim on an annual basis was also increased as follows:
- 15 percent of the first $300,000 (previously, $234,000) of Virginia qualified R&D expenses; an increase from $35,100 to $45,000.
- 20 percent of the first $300,000 (previously, $234,000) of R&D conducted in conjunction with a Virginia college or university; an increase from $46,800 to $60,000.
Taxpayers may now elect to compute the credit under an alternative computation established by the bill. Under the alternative computation, the taxpayer will be allowed a refundable credit equal to 10 percent of the Virginia qualified research expenses (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. For taxpayers that did not incur Virginia QREs in any of the three prior years, the tax credit under the alternative computation is 5 percent of the Virginia QREs paid or incurred in the taxable year. This is very similar to the Federal alternative simplified credit (ASC) method. The maximum annual credit allowed to a taxpayer under the alternative computation will be $45,000, or $60,000 if the R&D activities are 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) are precluded from claiming the refundable credit; however, the legislation creates a new nonrefundable credit computed the same as the alternative computation described above except that there is no limit on the maximum 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.
The bill prohibits taxpayers from claiming both the existing and new R&D tax credit for the same taxable year. Taxpayers are also precluded from claiming a credit for expenses incurred using embryonic stem cells.