Part of a Series on State and Local R&D Tax Credits
Since 1997, corporate entities are allowed a credit against the corporation business tax for qualified expenditures with respect to research conducted in Pennsylvania for each taxable year. Qualified Research Expenditures (“QRE”) are related to activities such as scientific experimentation or engineering that meet a four-part test and encourage the development of a new or improved product, process, technique, or computer software program held for sale, lease or license, and used by the taxpayer in a trade or business.
Pennsylvania sets aside $55 million in total tax credits per fiscal year. Of this total, $11 million is set aside for small businesses which Pennsylvania defines as, “for-profit corporations, limited liability companies, partnerships or proprietorships with net book value of assets totaling…less than five million dollars.”
The amount of the allowed credit equals 10% of the excess of the qualified research expense for the fiscal or calendar year over a base amount. For qualified small businesses, the research and development credit is equal to 20% of the amount by which the corporation’s qualified research and development expenses exceed the taxpayer’s Pennsylvania base amount.
The credit can be used to offset personal income tax, corporate net income tax, franchise tax, and capital stock. However, the research expenses must be conducted within Pennsylvania and the taxpayer must have at least 2 years of R&D expenditures.
R&D tax credits awarded may be carried forward for up to fifteen taxable years. Beginning in 2004, taxpayers with unused R&D tax credits could sell them for cash to other taxpayers that could use them. It should be noted that S corporations cannot sell or assign credits once they have been passed-through to its shareholders.
Scope of the PA R&D Tax Law Change
Beginning in 2018, the paper application has been replaced by an online application. All prior year information must be entered into the system regardless of whether the credit was applied for in each of those years. The user will be asked to enter basic information about the entity, as well as qualifying wages, how the project qualifies under IRC §41 and list out 3rd party labor costs. A copy of the filed Form 6765 must be faxed in to the department of revenue or the pro forma if the federal tax return wasn’t filed yet. The deadline for this submission is September 15th.
PMBA Insight: Pennsylvania offers a great tax incentive for companies to conduct research and development as it offers a state level incentive to supplement the federal one. Additionally, being able to sell unused tax credits to other taxpayers benefits start-ups and unprofitable companies. It should be duly noted that companies must have QRE’s for at least 2 years and can only sell unused tax credits that exceed any collectible tax liability against which the credit could offset.
For a complimentary consultation, please contact the PMBA National R&D Tax Credit Practice at R&DTaxIncentives@PMbusinessadvisors.com.