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Act 7 of 1997, created the Pennsylvania Research and Development (R&D) Tax Credit . The intent of the R&D Tax Credit was to encourage taxpayers to increase R&D expenditures within the state in order to enhance economic growth. Qualifying research expenses used in the calculation of the PA R&D Tax Credit mirror the federal government’s R&D Tax Credit definitions for qualified research expense:
- Employee wages for qualified services
- R&D supplies
- Payments for research to third-party organizations
In order to submit an application for R&D Tax Credits , a business must meet the following criteria:
- Must be an entity subject to Personal Income Tax or Corporate Net Income Tax
- Have research expenses incurred for qualified R&D conducted within Pennsylvania
- Must be in state tax compliance with the laws and regulations
- Have at least two years of R&D expenditures
Currently, the PA Dept of Revenue has a pool of $55 million in research credits to award all applicants in a given fiscal year with $11 million of that amount allocated exclusively for small businesses. Per the publicly available Report to the Pennsylvania General Assembly on the Research and Development Tax Credit (March 15, 2018) the entire $55 million in R&D Tax Credits was awarded to 1,126 applicants in December 2017. Without the $55 million cap, $108.1 million in credit would have been awarded to 1,126 taxpayers. Small businesses filed for awards totaling $22 million, more than the $11 million in R&D Tax Credit set aside for them, hence their awards had to be pro-rated.
The state’s tax credit rate for companies with assets over $5 million is 10%; for qualified small businesses with assets under $5 million, the tax credit rate is 20%. Any unused research credits may be carried forward for 15 years.
In our opinion, taxpayers will find it easier to apply for PA’s generous R&D tax incentive program using the new electronic application. Users will have instant access to their application to periodically check the status during the submission process.
How We Can Help
If you have any questions about the federal or PA R&D Tax Credit or if you would like to discuss your company’s unique situation, contact an R&D tax specialist at Intrepid Advisors. We can discuss ways to help your company attain the full R&D Tax Credit benefits it may be missing.