Virginia's robust innovation ecosystem, supported by the commonwealth's research and development (R&D) tax credit program since 2011, faces an uncertain future due to House Bill 1518 (HB 1518), which extended the tax credits through tax years ending before January 1, 2025, leaving no credits available for 2025 and forward.
Signed in 2024 by Governor Glenn Youngkin, the bill enhanced the Virginia R&D Expenses Tax Credit (RDC) through an increase of available funds to $15.77 million (up from the previous $7.77 million), making the tax credits more available to businesses. It also updated the Major R&D Expenses Tax Credit (MRD) to have a reduced pool of available credits to $16 million (down from the previous $24 million).
The R&D tax credit sunset comes despite legislative efforts during the 2025 General Assembly session to extend the popular incentives.
The 2025 Legislative Attempt To Extend Credits
During the 2025 Regular Session of the Virginia General Assembly, lawmakers introduced legislation to extend the life of several expiring tax provisions, including the R&D tax credits. House Bill 1969 (HB 1969) was a key vehicle in this effort, explicitly proposing to extend the sunset dates for both the RDC and MRD credits.
Despite support from the business and innovation communities, HB 1969 ultimately failed to pass from a conference committee on February 22, 2025. This legislative defeat meant that the statutory expiration dates of "taxable years beginning before January 1, 2025," for both credits remained unchanged. Consequently, businesses conducting R&D activities in Virginia during the 2025 tax year, and beyond, will not be able to claim these valuable state tax incentives.
The Impact of the Sunset
The expiration of these tax credits is a significant blow to Virginia's economic development strategy. The RDC, primarily utilized by smaller businesses, provided a refundable credit, offering crucial cash flow to startups and emerging companies.
The MRD credit, designed for larger enterprises with substantial R&D investments, offered a non-refundable tax credit with a generous carry-forward provision. Both were instrumental in fostering innovation, job creation and attracting high-tech businesses to the state.
Without these tax incentives, Virginia risks becoming less competitive compared to states that offer robust, ongoing R&D tax credit programs. Businesses may reconsider locating or expanding their research operations within the state, potentially leading to a deceleration in innovation and economic growth.
Hope on the Horizon: The 2026 General Assembly Session
While 2025 marks a temporary pause, advocates for the R&D tax credits are already gearing up for a renewed push in the 2026 Regular Session of the Virginia General Assembly, which typically convenes in January. Many policymakers well understand the economic benefits and competitive necessity of these tax credits, and it is highly anticipated that legislation to reinstate and extend the R&D tax credits will be a priority.
Potential Avenues for Action
New standalone bills, specifically focused on extending the RDC and MRD credits, will likely be introduced in both the House and Senate, similar to HB 1969 introduced in the 2025 General Assembly Session.
Legislators may also seek to include amendments, such as extensions or reinstatements, as part of the state's budget process. Additionally, the credits could be integrated into broader legislative packages aimed at enhancing Virginia's business climate and technology sector.
Key stakeholders, including industry associations, technology councils and individual businesses, are expected to actively lobby their representatives leading up to and during the 2026 session. They will emphasize the long-term economic benefits derived from these tax credits, including attracting federal R&D dollars, stimulating private investment and retaining skilled talent within the state.
What's Next for Virginia Businesses?
The Virginia R&D tax credit has been in existence since 2011, created by the Virginia General Assembly through House Bill 1447 and Senate Bill 1326 during the 2011 Session.
Looking ahead to 2026, businesses engaged in R&D in Virginia should pay attention to the discussions during the general assembly session for legislative updates. The efforts to reinstate Virginia's R&D tax credits are expected to be a central theme in the commonwealth's economic policy discussions for the upcoming year.
Your Guide Forward
Businesses should be prepared to account for the loss of the Virginia research and development tax credit in 2025, as it will impact their tax planning and future R&D investment decisions. Cherry Bekaert’s R&D Tax Credits team is here to help you navigate these legislative changes. Our professionals can educate and advise you on the impact this may have on your company.
Legislation concerning R&D tax credits is dynamic at both the federal and state levels, making it crucial for businesses to stay informed of new requirements and regulations. By leveraging these tax incentives through investments in R&D activities, companies can not only bolster their bottom line but also contribute to the state’s economic growth and development.
Reach out to a member of our team for a comprehensive review to help you take advantage of the R&D Tax Credit opportunities.
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