Pennsylvania makes major changes to R&D tax credit application process
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Pennsylvania R&D tax credit
Under Pennsylvania Code 61, section 9.17, the State of Pennsylvania offers a research credit that closely mirrors the federal research credit available under IRC section 41.
The Pennsylvania research credit is equal to 10 percent of the qualified research expenses that exceed the base amount. For qualified small businesses (a for-profit corporation, limited liability company, partnership or proprietorship with net book value of assets totaling less than $5,000,000), the research credit is equal to 20 percent of the qualified research expenses that exceed the base amount. The base amount for computing the Pennsylvania research credit is equal to the average Pennsylvania qualified research expenses for the four preceding taxable years.
Under Act 85 of 2016, the sunset date for the Pennsylvania research credit has been repealed, and the total tax credit cap is $55,000,000. Of the total tax credit cap, $11,000,000 is set aside for small business research credits. The Pennsylvania research credit can be used to offset Corporate Net Income Tax, Pennsylvania Personal Income Tax, and Capital Stock and Franchise Tax (through 2015). Pennsylvania research credits are transferable with approval from the Department of community and Economic Development. Any unused Pennsylvania research credits may be carried forward for a period up to 15 years but may not be carried back.
2018 application changes
Beginning in 2018, the State of Pennsylvania has implemented a Research and Development (R&D) Tax Credit online application system. The new online application system will replace the paper-based Form REV-545, and allow users to submit their applications, monitor the status, and complete action items needed to claim the Pennsylvania R&D Tax Credit. The application submission window is accessible beginning in June through the submission deadline of Sept. 15, 2018.
Taxpayers must meet four criteria in order to submit an application for the R&D Tax Credit:
- Must be an entity subject to Personal Income Tax (Article III) or Corporate Net Income Tax (Article IV).
- Must have research expenses incurred for qualified research and development conducted within Pennsylvania, as defined in section 41(d) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. section 41(d)) and section 41(b) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. section 41(b)) incurred for Pennsylvania qualified research and development.
- Must be in state tax compliance with the laws and regulations of the Commonwealth as determined by the Department of Revenue.
- Must have at least two years of R&D expenditures (previously only one year of prior R&D expenditures were required).
In order to file an application, users must create an electronic signature login through the Department of Revenue. Each user is able to file multiple applications on behalf of one or more businesses.
Users must acknowledge that the business has at least two years of research expenditures and agree to the Terms and Conditions in order to proceed to the R&D Tax Credit application.
Within the application, the user must identify information about the business and its tax records, such as entity type, FEIN, address and location of expenditures. The user will also be prompted to describe how the R&D project qualifies user IRC section 41 (b) and (d), and enter information relating to third-party/subcontractor labor costs. Lastly, the user will enter the prior years’ Pennsylvania R&D expenditures before proceeding to the current tax credit calculation. Once the tentative Pennsylvania R&D Tax Credit is computed, the user will complete a signature/verification and ownership compliance check.
The inputted information for the R&D application will then be summarized for the user to review and submit for processing.
- A confirmation number will then be sent to the user to include on any faxed documents, such as:
- A copy of Federal Form 6765 or a pro forma copy of Federal Form 6765 for each year listed with expenditures.
- A completed Page 2 of Form REV-545A for each year listed with expenditures.
- The Form 545A must be electronically submitted from the application menu bar.
- A written explanation of the difference between this year’s expenditures and prior filings of Form REV-545, if applicable.
- If filing as a small business, a copy of the balance sheet showing total assets less than $5,000,000 at the beginning or end of the year.
The documents must be faxed by Sept. 15, 2018 to The Department of Revenue (717-787-4683). Users will be able to monitor the status of the application, including when it was received, pending, awaiting final compliance, completed final compliance and credit awarded.
Additional application details and instructions can be found here.