Massachusetts R&D Tax Credit Summary
R&D Tax Credit Available
DOES IT APPLY TO C-CORPS & PASS THROUGHS?
It applies to corporations paying excise tax under MGL c 63
Two nonrefundable credits (Fixed Base Ratio and ASC) with similar definitions as federal for Qualified Research Expenses and Qualified Research Activities except only include Massachusetts-based expenses.
10% on incremental expenses for Fixed Base Ratio method.
7.5% on incremental expenses for 2020 (10% for 2021 and after) for ASC method.
What is the federal Research and Development Credit?
The R&D credit is a business tax credit that can be used to reduce federal income tax and is available to companies developing new or improved products, processes, software, techniques, or formulations. Taxpayers qualify for the credit if they paid or incurred qualified research expenses while conducting qualified research activities.
How is the R&D Credit claimed?
The R&D tax credit is claimed on a timely filed tax return, including extensions. The R&D tax credit can also be claimed on amended tax returns. The rules for amended returns are generally the previous 3 tax years. The credit is reported on IRS Form 6765, Credit for Increasing Research Activities, for the year in which the qualified expenses were paid or incurred. For Sub-S Corporations, LLCs and other types of business entities, the credit is passed-thru to the shareholders on their individual Schedule K1.
Is there a limit to the amount of the federal research credit that can be claimed?
There is no limitation on the amount of R&D tax credits that can be claimed each year.
Is the R&D Credit a refundable credit?
The R&D tax credit is not refundable. Any Research & Development Credit that is not used to offset the taxpayer’s tax liability for the year in which the qualified research expenses were paid or incurred is carried back one with the remainder able to be carried forward for up to twenty years.
Can the research credit be claimed for a prior year?
Yes, a taxpayer can claim credits for prior tax years. Taxpayers typically have three years from the original filing date to amend. In some cases, more than 3 years will be available for amending.
How does the acquisition or disposition of a business entity affect the research credit computation?
Acquisitions or dispositions of trades or businesses should be identified when calculating the R&D tax credit for both the base period and the current year qualified expenditures. Consistency between these periods is required per IRC §41(c)(5). For example, if a company acquires another entity in the current year, that entity’s R&D expenses are included in the current year R&D tax credit calculation and the entity’s prior R&D expenses will also need to be reflected in the base period years.
Does the research credit provide a dollar-for-dollar cash savings of federal income tax?
Yes. A company computes its R&D tax credit and then that credit is directly applied against the company’s federal tax liability owed in the current tax year in which the credit is claimed. Unused credits then carryback one year and then forward for 20 years.
What is qualified research for the purpose of computing the R&D Credit?
The IRS has established a four-part test that taxpayers must apply to each of their business activities (components). The four tests are described in 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.
How is the R&D Credit computed?
There are two general methods for computing the Research Tax Credit, the Regular Credit (RC) Method and the Alternative Simplified Credit (ASC) Method. Both methodologies are included on IRS Form 6765, Credit for Increasing Research Activities. The taxpayer is permitted to elect either of the two methods when preparing a timely filed return, but since each method has distinct advantages and disadvantages, it is important to understand the two computation methodologies particularly because the elected method cannot be changed on an amended return.
What expenses quality for the R&D Credit?
Qualified research expenses (QREs) include taxable wages, supplies used in qualified activities, contract research costs and certain payments to cloud service providers.
How do I know if the credit will benefit my company?
The first step is to evaluate your ability to utilize the R&D tax credit. Since the credit is not refundable, you need to be paying take to benefit from the R&D tax credit process. Once it is determined there is sufficient tax available for your company to benefit from the credit, it is time to proceed to the next step which includes determining the qualifying research expenditures and
estimating your R&D tax credit.
Our company has been manufacturing the same products for several years. We do have some new products, but how is that Research & Development?
The definition of research for R&D tax credit purposes is quite broad. If you are conducting engineering activities that are new to you as a company and there is risk associated with the success of the outcome, this may qualify as R&D. 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. Any company trying to improve what they do, be more competitive, reduce costs or increase market share will likely have qualifying activities.
How much company time and effort will this require?
Many of our clients have this concern at the outset of the project and are surprised at how little disruption the process causes. In general, your personnel will spend 10 – 20 hours spread over several people (15 – 45 minutes from each person). Clients that are better organized and willing to assist us in upfront planning generally spend less time.