The R&D tax credit can help a wide variety of businesses
offset and reduce their income tax liability, in addition to
providing many other benefits.
The tax credit is calculated at 15% on the first $300,000 of expenses exceeding a certain base amount, with a maximum limit of $45,000 for tax years before 2023.
After January 1, 2023, Virginia H.B. 1518, Chapter 661, changes two research and development tax credits by lowering the cap for the major research and development credit from $24 million to $16 million and increasing the cap for the aggregate research and development credit from $7.7 million to $15.77 million.
Qualifying activities which are eligible for the Research and Development Expenses Tax Credit include activities that are similar in nature to activities described within the Internal Revenue Code (IRC) §41(d)(1) and all four must be met to qualify for the credit. In addition to the four tests, the company carrying out the work must bear the financial risk of development and have rights to the research being performed.
Examples include developing new products or improving existing products; experimenting with new materials; building and testing prototypes and models; developing new or improved software applications; testing new concepts; and developing or improving manufacturing processes.
The eligibility for the tax credit extends to both C-Corporations and pass-through entities.
To qualify for the Virginia R&D Tax Credit, businesses may claim expenses related to qualifying research and development (R&D) activities performed within Virginia. These expenses may include wages and salaries paid to employees involved in R&D, supplies and materials used in R&D activities, contract research expenses paid to third-party service providers, equipment and facilities used in R&D activities, and certain expenses related to obtaining patents, including legal fees.
It’s important to note that these expenses must be properly documented and substantiated to claim the credit. Furthermore, only expenses related to qualifying R&D activities within Virginia are eligible for the Virginia R&D Tax Credit.
To claim this tax credit, eligible taxpayers must complete and submit Form RDC, also known as the Application for the Research and Development Expenses Tax Credit, to the Department along with any necessary supporting documentation. Along with any other documentation required by the Department, the documentation typically includes a thorough account of the research activities and costs incurred during the tax year.
It is important to note that this tax credit is refundable and transferable. All things considered, the Research and Development Costs Tax Credit gives qualified taxpayers the chance to get a refundable and transferable tax credit for qualifying research and development expenses.
Virginia provides the Research and Development (R&D) Tax Credit, which enables a refundable individual and business income tax credit for engaging in qualified research and development in Virginia, for taxpayers whose qualifying R&D expenses (QREs) exceed a base amount.
To be considered a qualified business, the company must either have its principal office or facility located within Virginia or be primarily engaged in business activities or production within the state. This means that the company’s main operations or manufacturing processes must take place in Virginia, indicating a significant contribution to the state’s economy. By meeting these criteria, a qualified business can potentially access benefits or incentives offered by the state of Virginia to support its growth and expansion, promoting economic development within the region.
The Virginia research and development tax credit allows for businesses to claim a percentage of their qualifying research expenses.
Wages paid to employees who are directly involved in the performance of research and development activities within the state of Virginia. This includes payments made to subcontractors involved in the performance of such activities.
Most states offer R&D tax credits as well with many of them being more lucrative than the federal credit. At Source Advisors, we can help assess your company’s federal R&D tax credit opportunity and also determine any state R&D tax credit availability. Our team of experienced CPAs, attorneys, engineers, and technology experts helps companies save money and create cash flow with R&D tax credits that can then help drive overall growth.
