Recently, Virginia enacted a number of changes to the state’s Research and Development Expenses Tax Credit (R&D credit) through Senate Bill 110, including providing taxpayers additional time to apply for the credit, increasing the maximum credit availability and extending the years for which the credit is available.
R&D credit background
Virginia offers a refundable individual and corporate income tax R&D credit for businesses with qualified research and development expenses. The credit may be calculated using one or two available methods. Under the first method, a taxpayer may claim a credit of 15% of the first $300,000 in qualified expenses, or 20% of the first $300,000 in qualified expenses when the research was conducted in conjunction with a Virginia college or university. Under the second method, the credit is 10% of the difference of the Virginia qualified research and development expenses paid or incurred during the taxpayer year and 50% of the average research and development expenses paid or incurred for the preceding three taxable years. If the taxpayer did not pay or incur Virginia qualified research and development expenses in any one of the three taxable years immediately preceding the taxable year for which the credit is being determined, the tax credit is 5% of the qualified research and development expenses paid or incurred by the taxpayer during the relevant taxable year.
Under either calculation methodology, the total credit cannot exceed $45,000 for the taxable year, or $60,000 when the research was conducted in conjunction with a Virginia college or university.
Qualified research and development expenses are those as defined in section 41(b). Eligible expenses must be related to research conducted in the state.
R&D credit changes
Senate Bill 110 provides a number of taxpayer-friendly changes to the credit. The application deadline for the credit is extended to September 1 of the calendar year close of the taxable year in which the expenses were paid or incurred. Previously, the application deadline was July 1.
Additionally, the aggregate amount of R&D credit available to all applying taxpayers has increased. The previous cap was $7 million for tax years 2016 and after. If more than the aggregate amount is requested, the state awards credits on a pro rata basis to all qualifying credit applicants. In recent years, taxpayers received approximately 50% of their requested credit. For taxable years beginning on and after Jan. 1, 2021, the total amount of credits granted for each fiscal year beginning with fiscal year 2022 is increased to $7.77 million.
Finally, the sunset date of the R&D credit is extended from Jan. 1, 2022 to Jan. 1, 2025.
Virginia offers taxpayers a number of credits and incentives, including training credits, investment credits, research and development credits and business facility credits. The Virginia Major Research and Development Tax Credit, similar to the R&D credit, but for businesses with over $5 million of qualified research and development expenses, received similar enhancements including the same extended application deadline, a higher aggregate credit cap and an extension of its sunset date.
Businesses in every industry should consider State tax planning in response to economic distress. Substantial state and federal relief through credits and incentives is available to assist taxpayers in a downturn economy. Additionally, many states have existing programs in place for hiring or maintaining employment levels, investing in capital or training workforce.