Virginia Research & Development Tax Credits
In 2016, the Commonwealth of Virginia enhanced its existing Research and Development Expense Tax Credit (“R&D credit”) and created a new Major Research & Development Expense Tax Credit (“Major R&D credit”) for taxpayers that incur qualified expenses in excess of $5 million during the taxable year. If your business is engaged in R&D activities within Virginia it can apply for the credit for which it qualifies, but not for both.
Amendments to Virginia’s Existing R&D Credit
Virginia’s existing R&D credit was improved effective for tax years beginning on or after January 1, 2016. Your business can benefit if it has increased its expenditures on certain specified research activities within the state beyond a threshold amount. This credit must be approved by the Virginia Department of Taxation (“the Department”) before it can be claimed, and the amount allowed to all taxpayers (collectively) is subject to an annual limitation. The R&D credit is a generally a refundable credit, therefore if the approved amount exceeds your Virginia income tax liability, your business could receive a check for the excess.
The primary features of the R&D credit are as follows:
- The maximum credit that most businesses can apply for is $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 is $60,000. This credit is calculated as 20% of the first $300,000 of VAQREs that exceed the base amount.
- Taxpayers may also use an alternative simplified computation (“ASC”) method, in which the credit is equal to 10% of the excess of the VAQREs paid or incurred during the tax year over 50% of the average amount paid or incurred over the three immediately preceding tax years.
- The maximum amount of R&D credits that can be granted to all taxpayers during a particular year is $7 million. If the total amount of credits applied for by all taxpayers are less than the cap for the year, additional credits may be allocated to taxpayers with VAQREs in excess of $300,000 for the year. In contrast, to the extent that the total applications for credits exceed the cap, the amount of credit that each taxpayer can be allocated is reduced on a pro-rata basis.
- Due to the large number of applications that the Department received concerning the 2016 tax year, applicants received approximately 50% of the credit amount for which they originally applied.
- The due date for applications is July 1 of the calendar year following the close of the tax year in which VAQREs were incurred.
- The current expiration date of the credit is January 1, 2022.
Virginia’s New Major R&D Credit
The Major Research and Development Expenses Tax Credit (“Major R&D credit”) is effective for taxable years starting on or after January 1, 2016, but before January 1, 2022, and is available if your business incurred VA qualifying research expenses (“QREs”) in excess of $5 million for the taxable year. The primary features include:
- The Major R&D credit is calculated using the ASC method, which is generally equal to 10% of the excess of the VAQREs paid or incurred during the tax year over 50% of the average paid or incurred over the three immediately preceding tax years.
- The maximum amount of credits that can be granted to all applicants is $20 million per year. To the extent that taxpayers apply for credits in excess of the cap, the amount of credit that each taxpayer can be allocated is reduced on a pro-rata basis.
- The Department received approximately $52 million in Major R&D credit applications in 2016, which resulted in applicants receiving about 38% of the credit amount for which they originally applied.
- There is no annual limit on the amount of VAQREs that your business can use to compute the Major R&D credit. However, it cannot use the credit to offset more than 75% of its tax liability for the tax year at issue. Thus, the Major R&D credit is not refundable. Any credit in excess of this limit can be carried forward for 10 years.
- Applications must be submitted no later than July 1 of the calendar year following the close of the tax year in which VA QREs were paid or incurred.
What are Virginia Qualified Research and Development Expenses?
If your business currently benefits from the Federal R&D credit, the same expenses can generally be used to apply for the Virginia R&D or Major R&D credits to the extent that it incurred the costs within the state of Virginia. Virginia qualified research is generally defined with reference to Internal Revenue Code § 41(d), but the research must be conducted within the Commonwealth of Virginia. The definition of qualified research is fairly broad, but there are certain exclusions from the definition based on the Internal Revenue Code.
If you would like assistance in determining whether your business qualifies for one of these or other tax credits, please contact the Credits and Accounting Method’s team to assist you.