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State R&D tax credits: A state tax planning opportunity

Dec 15, 2019

Has your company claimed the federal research and development (R&D) tax credit in the past? Did you know your state may have an R&D credit too?

While companies are becoming more aware of the federal R&D credit and how they can benefit from it, sometimes the corresponding state credits are overlooked.

How do you compute state R&D credits?

The R&D credit calculation requirements and R&D credit percentage are unique from state to state. 

There is commonality, though, between the states. Typically, only the qualified research expense that your company incurs within the borders of a specific state are eligible toward that state’s R&D credit. (While the qualified research expenses for a state are only eligible if conducted within that state, these same qualified research activities would also be eligible for the federal computation.)

For example, your company has two facilities, one in Massachusetts and one in Kansas. Employees at each facility are engaged in qualified research activities. 

Your company computes the qualified research expenses at the Massachusetts facility to be $30K, and the qualified research expenses at the Kansas facility to be $10K. The $30K of qualified research expenses occurring in Massachusetts would be eligible for inclusion in both the federal and Massachusetts credit computations. The $10K of qualified research expenses occurring in Kansas would be eligible for inclusion in both the federal and Kansas credit computation.

Similar to the available federal computation methods, there may be multiple ways to compute a specific state R&D credit. Generally, states have computed the R&D credit one of two ways: a comparison of the trend of qualified research expenses over time or a comparison of qualified research expenses to gross receipts.

The first method compares the company’s current-year qualified research expenditures to those of a base period (commonly, the qualified research expenses for the prior three years). Below is a side-by-side comparison of similar expenses computed using both the 2019 Wisconsin and Illinois computations, as an example.

State R&D tax credits: A state tax planning opportunity

The differences between the Wisconsin and Illinois credit computations has been bolded.  

  • Illinois has a higher credit percentage (6.5%) over the Wisconsin credit percentage (5.75%).
  • Wisconsin’s computation compares the current-year eligible expenses to 50% of the prior three-year average; a smaller feat to exceed than the Illinois computation that requires a company to exceed the average eligible expenses from the prior three years.

State credit utilization: How do you claim the state R&D tax credit?

Many states allow taxpayers to claim the state R&D credit via completing and filing a state research credit form with the income tax return. Minnesota, South Carolina, Illinois and Wisconsin — to name a few — have state forms to complete and file with the income tax return.  

Other states have an application process. Pennsylvania, for example, had a 2019 R&D credit state budget capped at $55 million. Taxpayers that incurred qualifying R&D expenses in Pennsylvania must apply for the credit before the application deadline. 

Are you eligible for state R&D tax credits?

If you have questions about your company’s facts and whether or not your company is eligible for state research credits, we can help. Contact us to start the discussion, or keep reading on about the R&D credit:

Could you qualify for the R&D tax credit and not know it?

Is your company eligible for the Research & Development tax credit but has no income? Consider offsetting payroll tax instead.

Author(s)

Christina Schultz, CPA
Senior Manager, Tax
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