Earlier this summer, Pennsylvania Gov. Tom Wolf signed House Bill 952, extending the time to file Pennsylvania’s Research and Development (R&D) tax credit application from Sept. 15 to Dec. 1. House Bill 952 amends the following due dates related to the R&D tax credit:
- The application due date has been revised to Dec. 1
- Award letters will be provided to taxpayers by May 1 of the following calendar year. For this year’s application, taxpayers may expect to receive their award letters by May 1, 2022.
- The Pennsylvania Department of Revenue is required to issue an annual report on the effectiveness of the credit to the legislature by Oct. 1, instead of March 15.
The Pennsylvania R&D credit
Taxpayers are required to provide both qualitative and quantitative information on the R&D credit application. The credit is based off of three separate expenditures that must all be incurred in the commonwealth (wages, supplies and contract research), which is consistent with the expenditures for the federal R&D tax credit. However, the Pennsylvania credit includes notable differences from the federal, including a longer base period of four years, instead of the three-year period under the federal ASC methodology, as well as the reporting of additional detailed information related to subcontractor costs (i.e., expenses incurred by contractor, contact phone number, FEIN and whether a W-2/1099 was issued).
Applications must be submitted online with the Pennsylvania Department of Revenue. Once submitted, the department will issue an award letter to the taxpayer with the percentage of the applied-for (i.e., tentative) credit. The latest annual R&D credit report issued by the department explains that the overall average award percentage in the most recent tax year for all applicants was 26.5% of the tentative credit. Award percentages generally vary from year-to-year depending on the number of taxpayers applying for the credit and the amounts being requested on the application. Final credits are awarded based on availability proportional to the R&D tax credit pool, which has been funded at $55 million annually since 2011.
Taxpayers eligible for the Pennsylvania R&D credit must submit an application by Dec. 1 for qualified expenses incurred in the taxable year that ended in the prior calendar year. The two-and-a-half month extension is a significant benefit for taxpayers that have struggled in prior years to gather all of the necessary documentation. Corporate taxpayers were often unable to complete the application by Sept. 1 considering the timing of other tax compliance obligations. Noteworthy, the Pennsylvania credit has a number of nuanced differences from the federal credit which should be closely reviewed before considering an application.
Many states in addition to Pennsylvania offer R&D credits, often with minor compliance or application differences from the federal credit. Taxpayers with R&D expenditures should closely evaluate eligibility for state or federal R&D tax credits, and speak to their tax credits and incentives advisers for more information.