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R&D Tax Credit for Virginia Startups & Small Businesses

January 6, 2022
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Take Advantage of the Virginia R&D Tax Credits

If you’re a small business or a startup in Virginia, there are some federal and state tax changes you should check out as you plan for the future, because these tax laws could help you secure lucrative tax breaks – which could mean more money you can use to reinvest in your business.

When the federal Research & Development (“R&D”) tax credit was expanded and made permanent via the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”), new provisions were added that specifically benefit startups and small businesses. If your business can benefit from the federal R&D tax credit, the same qualifying expenses may be used to apply for the Virginia R&D tax credit.

Small Businesses & the R&D Tax Credit

Many small to mid-size business owners are well aware of the limitation that the Alternative Minimum Tax (“AMT”) has on the usage and effectiveness of particular tax deductions and credits. Effective for the 2016 taxable year, if your business is considered an “eligible small business,” you can use the federal R&D tax credit to offset your AMT liabilities. An eligible small business is generally defined as a business with average annual gross receipts of $50 million or less for the three preceding taxable years.

Startups & the R&D Tax Credit

Effective for taxable years starting in 2016, if your business is a “qualified small business,” you can use the R&D tax credit to offset up to $250,000 of payroll tax liabilities. This can be a pivotal tax incentive for a startup company that has not yet generated income tax liabilities.

A startup is considered a “qualified small business” if it is a corporation, partnership, or individual with less than $5 million in gross receipts during the current taxable year in which the R&D tax credit is determined and $0 in gross receipts in all taxable years preceding the five-year period that ends with the current “credit” year (a five-year look back).

 

R&D Tax Credit for Virginia Startups & Small Businesses

 

New Advantages under the Virginia R&D Tax Credit

The Virginia R&D tax credit (“VARDC”) is similar to the federal R&D tax credit in application, but the definition of what qualifies as R&D is broader and all qualified research must take place in Virginia. Virginia’s State Bill 58 (“SB 58”) modified the existing VARDC, effective for tax years beginning on or after January 1, 2016, providing taxpayers operating in Virginia with the following new advantages:

  • Major R&D Tax Credit – The Major R&D tax credit is available if your business incurs qualified research expenses in Virginia (“VAQREs”) in excess of $5 million for a taxable year; however, companies cannot elect the existing VARDC and the new Major R&D tax credit in the same year. The Major R&D tax credit is generally equal to 10% of the excess of the VAQREs incurred during the tax year over 50% of the average VARQEs incurred over the three immediately preceding tax years. The aggregate amount of Major R&D tax credits granted cannot exceed $20 million.
  • Increase in Allowable Regular Credit Claim Amounts – The maximum credit for which most businesses can apply has been increased from $35,100 to $45,000. This credit is calculated as 15% of the first $300,000 of VAQREs that exceed the base amount. The maximum refundable credit that can be applied for, with respect to research conducted in conjunction with a Virginia college or university, has been increased from $46,800 to $60,000. This credit is calculated as 20% of the first $300,000 of VAQREs that exceed the base amount.
  • Alternative Calculation Methodology – Prior to January 1, 2016, taxpayers had a single credit methodology. Similar to the federal Alternative Simplified Credit (“ASC”), using the Virginia ASC provides taxpayers another method to maximize the credit claimed.
  • Extended July 1 Application Deadline – Unlike the federal R&D tax credit, this credit must be approved by the Virginia Department of Taxation before it can be claimed. Prior to SB 58, the original application deadline was April 1. Under SB 58, the application date has been extended to July 1.
  • Extended Expiration Date – The expiration date of the VARDC was extended from January 1, 2019, to January 1, 2022.
  • Increased Cap – For tax years starting January 1, 2016, or after, the maximum amount of VARDCs granted to all taxpayers during a particular year has been increased from $6 million to $7 million.