Enhanced Federal Credit, New $20M State Credit and More

Virginia Tax Planning Graphic

With so many new favorable changes in the area of the federal Research and Development Tax Credit, many taxpayers will now have a great new opportunity to secure this incentive for the first time, or significantly increase the amount of their credit if already claiming it.   And, most businesses eligible for federal R&D tax credits are also eligible for state incentives.  Thanks to Virginia’s SB 58 which was signed into law earlier this year and incorporates into it SB 161, there will be significant opportunity to earn and utilize the Virginia R&D Credit for businesses residing within the “lovers” state.

For businesses entering into the 2016 tax planning season, here are 5 key takeaways that can help you to evaluate whether new tax savings opportunities may be worth exploring:

Federal R&D Tax Credit:

  1. Enhancements to the Federal R&D Credit: With the signage of the Dec. 2015 PATH Act, Treasury provided us with a permanent R&D Tax Credit along with a new payroll tax offset provision benefiting startup companies, and an AMT offset provision benefiting eligible small businesses. If that weren’t enough, earlier this month, treasury published final regulations around internal use software development (IUS).  Due to the aforementioned changes in IUS regulations, more taxpayers than ever will find themselves with eligibility to claim the credit and to utilize the benefit.

Virginia R&D Tax Credit

  1. New Annual $20 Million R&D Credit — Under SB 58, Virginia businesses incurring over $5 million of in-state Qualified Research Expenses (QREs) will have opportunity claim Virginia’s NEW R&D Credit. Under the new credit, the state of Virginia will grant up to $20 million in credits to applicants.  The new credit will be available from tax year January 1, 2016 up until January 1, 2022. (Specific calculation and utilization requirements apply, and refundability is not applicable.) This provision is intended to incentivize large taxpayers, by setting no annual limit on the amount of QREs a taxpayer uses to calculate its annual credit, such as the general methodology provides for.  However, there is limit in how much tax liability may be offset.  A taxpayer may offset up to 75% of its annual tax liability, and if there is any excess credit unutilized, it may be carried over for 10 years.
  1. $1 Million Increase to Overall General Credit Claims – Prior to January 1, 2016, the Virginia Department of Taxation allowed for up to $6 million in R&D credit claims to be granted to taxpayers within a given taxable year. Under SB 58, this cap has been increased to $7 million.  Under the regulations, if the $7 million cap is not reached, taxpayers with $300,000 or more of in-state QREs would have opportunity to receive a claim in greater excess in which they filed.
  1. Increase of Allowable Credit Claim Amounts – Prior to January 1, 2016, most businesses were able to apply for a credit up to the maximum allowable amount of $35,100. For businesses conducting research in conjunction with a Virginia college or university, the maximum allowable amount was $46,800.  Under SB 58, the allowable amount of credit claims have increased for most businesses from $35,100 to $45,000, and for those working in conjunction with a college or university from $46,800 to $60,000.
  1. Alternative Calculation Methodology –  Prior to January 1, 2016, taxpayers had a single credit methodology that could be used to calculate the state credit.  Under SB 58, a new Alternative Simplified Credit (ASC) methodology has been enacted.  The ability to elect from two different credit methodologies provides taxpayers with an increased means to maximize credits claimed. This new method, which mirrors the federal ASC calculation methodology as far as the base amount computation, may also allow taxpayers who are not increasing their R&D expenses, to earn credits.
  1. Extended July 1st Application Deadline – Prior to January 1, 2016, taxpayers looking to make a Virginia state R&D credit claim had to file an application with the Virginia Department of Taxation by April 1st. Under SB 58, this application date has been extended to July 1.

If you are a Virginia business conducting research and development activities, such as the development of a new or improved product or process, the R&D tax credit is certainly a benefit you should be considering as part of your tax planning.  And, if you have questions on qualifying eligibility, be sure to contact us today at http://taxcreditsgroup.com/contact-us or (440) 331-0714.

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