Small businesses seeking another way to save money can get tax credits for their research and development (R&D) activities. Organizations can double-dip by claiming state-level and federal-level R&D tax credits. Over 35 states offer a state-level R&D tax credit, and we discuss what needs to be done to claim each state’s additional tax savings.
Regardless of which state-level R&D tax credit you are claiming, an organization must conduct R&D in the state whose credit they are applying for to be eligible for that state’s R&D tax savings. However, if you conduct R&D in multiple states, you may be eligible to receive a tax credit for each one. States with a state-level R&D tax credit include:
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Dakota
- Rhode Island
- South Carolina
Arizona has both refundable and nonrefundable credit. To qualify for the refundable portion of the tax credit, companies must employ less than 150 full-time employees. The refundable amount is 75% of the allowable credit that exceeds the taxpayer’s tax liability. The remainder of the excess credit is waived if the taxpayer chooses a refund. Refundable amounts are capped at $5 million per year.
Unused tax credits can be carried forward for the next 15 consecutive years for tax years beginning before 2022. For tax years beginning after 2021, businesses can carry forward unused credits for up to ten years.
Businesses that conduct qualifying research activities (QRAs) must apply to the Arkansas Department of Economic Development (ADED) for research under one or more of the R&D programs offered by the Arkansas Science and Technology Authority (ASTA).
Organizations can claim a credit of up to 20% of qualifying research expenses (QREs) that exceed the base year for three years and the incremental increase in QREs for the following two years.
If your business is contracted with an Arkansas college or university and performs QRAs for federal R&D credits, it may qualify for a 33% credit for its QREs.
Arkansas’ state-level R&D tax credit can be used to offset 100% of the Arkansas state tax liabilities. Any amount over the state tax liability may be carried forward for up to 9 consecutive tax periods.
California’s state-level R&D tax credit is similar to the federal-level one. The R&D tax credit is equal to 15% of qualified expenses that exceed a base amount and 24% of basic research expenses for university-based research for the taxable year.
If a company does not use its research credits, they must be applied to the earliest tax year possible. However, credits can be carried forward indefinitely. While California does not have an Alternative Simplified Credit (ASC) option, its R&D tax credit is permanent.
Colorado’s state-level R&D tax credit is 3% of the amount by which QREs in the enterprise zone exceed the taxpayer’s average QREs from the preceding two years. In each tax year, a company can claim a maximum of 25% of the total credit plus any carryover amount from a prior year up to 25% of the original credit.
The Colorado Enterprise Zone Program administers the credit, and companies must pre-certify with their local Enterprise Zone administrator annually to qualify for the credits. Once certified, businesses must complete a certification application, receive approval from their Enterprise Zone Administrator, and submit certification documents with their Colorado income tax filing.
Connecticut has two state-level R&D tax credits, an incremental and a non-incremental one. C corporations can claim both incremental and non-incremental credit.
The incremental credit equals 20% of the incremental increase in R&D expenses. Incremental credit can be carried forward up to 15 years.
The non-incremental credit allows businesses to claim up to 6% of the current year’s QREs, dependent on gross receipts. Non-incremental credits from tax years beginning on or after January 1st, 2021, can be carried forward up to 15 years, while credits from previous years can be carried forward indefinitely.
Both credits can reduce taxpayer liability by up to 70% and are partially refundable for those whose gross income does not exceed $70 million and have no tax liability.
Delaware’s state-level R&D tax credit is similar to the federal-level one. However, there are a few notable differences. One of the most significant differences is that there are two ways to calculate the amount of credit. The first method businesses can use is to take 10% of the total Delaware-qualified QREs over the Delaware base amount. Companies can also use the federal Alternative Simplified Method and take 50% of Delaware’s appointed share of the credit.
Organizations with under $20 million in gross receipts are eligible for 10% of the QREs, and taxpayers who opt for the Alternative Simplified Method can receive 100% of Delaware’s appointed share of the credit. Businesses can carry forward any excess state-level credits up to 15 years. To qualify for the state-level credit, organizations must send their application to the Division of Revenue by September 15th for research expenses in the taxable year that ended in the prior year.
Florida’s state-level R&D tax credit is available to C corporations certified by the Department of Economic Opportunity as a qualified target business industry. These include:
- Cloud Information Technology
- Emerging Technologies
- Homeland Security/Defense
- Information Technology
- Life Sciences
- Marine Sciences
- Materials Science
- Nanotechnology Industries
The tax credit is 10% of the excess QREs over the base amount. The base amount equals the average of the previous four years’ QREs. The maximum credit available for businesses that have not been around for at least four taxable years immediately before the taxable year is reduced by 25% for each year the business or predecessor corporation did not exist. Further, the credit is limited to 50% of the company’s tax liability after applying other tax credits to your tax burden.
To qualify for the R&D tax credit, organizations must file an application on or after March 20th but before March 27th of the same year for QREs incurred in the previous calendar year. In addition, companies must claim a federal R&D tax credit to qualify for the Florida credit. Lastly, companies can carry any excess credit forward up to five years.
Georgia allows companies to earn R&D tax credits at the state level. To qualify for Georgia’s credit, organizations must submit Form IT-RD and federal Form 6765 with their Georgia income tax return for each tax year QREs were incurred.
Georgia’s R&D tax credit equals 10% of the excess QREs over the base amount. The credit can offset up to 50% of net Georgia income tax liability after applying for other credits. Further, organizations can use tax credits against state payroll withholding and carry them forward for up to 10 years.
Hawaii’s state-level R&D tax credit allows companies to claim a refundable credit against a corporate or personal income tax for qualified high-tech businesses that conduct more than 50% of their activities in QRAs. The credit is 20% of the QREs for the taxable year.
Eligible organizations must submit an application to the Department of Business, Economic Development, and Tourism (DBEDT) by March 31st, following the taxable year the research was conducted. Businesses must also complete an online questionnaire detailing qualifying expenditures, revenue data, expenses, and intellectual property filings by June 30th. The DBEDT will certify qualifying companies on a first-come, first-served basis and stop certifying once the amount of credit reaches $5 million.
The state-level R&D tax credit is set to expire and will not apply for tax years beginning after December 31st, 2024.
Idaho’s state-level R&D tax credit is similar to the federal-level credit. However, there are a few differences. The credit rate is 5% of the taxpayer’s current QREs that exceed the base amount, and excess credit can be carried forward for up to 14 years.
Taxpayers cannot use the federal alternative simplified credit calculation for the state-issued R&D tax credit. In addition, corporations must claim the credit against Idaho income tax before being able to share the credit.
Illinois’ state-level R&D tax credit differs from the federal credit. The base amount is the average of qualifying expenses in the three taxable years immediately preceding the year a business is filing for. The non-refundable research credit is equal to 6.5% of QRE for qualifying research activities that exceed the base amount.
Unused research credit may be carried forward five years or until it has been used, whichever occurs first. Lastly, partners and shareholders of S corporations are eligible to receive the credit according to the determination and distributive share of income.
Indiana provides two methods to claim and calculate its R&D tax credits; one way is similar to Sec 41 of the federal R&D tax credit. Indiana’s credit is 15% of the expenses under $1 million or the remainder of the taxpayer’s QREs minus the base amount incurred on or after January 1st, 2008. For the rest of the QREs exceeding 1 million, the credit amount is 10%.
The second calculation method is 10% of QREs over 50% of the average of the past three years of QREs incurred on or before January 1st, 2010. If there are less than three years of QREs, the amount is 5% of QRE for the taxable year. Unused credits can carry forward for up to 10 years.
Like the federal R&D tax credit, Iowa’s state credit can be calculated using the Regular or Alternative Simplified Credit Method. However, there are differences between Iowa’s credit and the federal one. If a company opts for the regular tax credit, the credit is 6.5% of either the base amount or 50% of QREs, whichever is lower. The Alternative Simplified Credit is 4.55% of QREs for the past three years.
If a company receives awards from the Iowa Economic Development Authority, it can calculate a Supplemental Research Activities Credit. The Supplemental Credit is an additional 10% of a company’s qualifying incremental research expense for gross revenues under $20 million and 3% for companies with gross incomes over $20 million. Businesses must calculate supplemental tax credits using the same method as the state-level credit.
Kansas’ state-level R&D tax credit is currently 6.5% of the difference between the actual QREs for the year and the average of expenditures made during the year and the previous two tax years. For tax years after December 31st, 2022, Kansas will increase the credit to 10%. Credits are limited to 25% in a single tax year, plus any carry forward. Businesses can carry forward tax credits in 25% increments until the full credit is used.
While the tax credit is currently only available to C corporations, Kansas is set to expand its R&D tax credit eligibility for tax years after 2022. Under the eligibility expansion, individuals, partnerships, S corporations, limited liability companies, and other pass-through entities can claim Kansas’ R&D tax credit.
The final change to the R&D tax credit policy allows organizations to transfer the credit to any person, allowing them to claim it as a credit against their Kansas income tax liability in the tax year when it was transferred. This change will take effect in tax years starting in 2023.
To claim the Kansas R&D tax credit, businesses must complete the Schedule K-53 form alongside their income tax return.
Kentucky’s R&D tax credit is available to companies participating in the “Construction of research facilities.” Construction of research facilities is defined as constructing, remodeling, and equipping facilities in Kentucky for qualified research. Facilities must be tangible, depreciable property and not include any amounts paid or incurred for replacement property. Organizations can carry forward unused credit for up to ten years.
Louisiana’s state-level R&D tax credit is 30% for companies with less than 50 employees, 10% for those with 50-99 employees, and 5% if there are 100 or more employees.
To file for the R&D tax credit, companies must apply for and obtain a credit certification from the Department of Economic Development. The base amount is 50% of the average of the past three years of QREs if a company employs less than 50 people and 80% if there are 50 or more employees.
Professional services firms and companies whose primary activity is manufacturing custom manufacturing or fabricating without a pending or issued United States patent related to QREs claimed do not qualify for the state-level credit.
Maine’s R&D tax credit has a few notable differences from the federal-level one. The research expense tax credit caps at 5% of excess QREs that exceed the previous three-year average and 7.5% of basic research payments. Credits are limited to 100% of the first $25,000 in tax liability plus 75% of the tax liability over $25,000. Unused credits can be carried forward for up to 15 years.
Marylanders can qualify for two state-level R&D tax credits, the Basic R&D Tax Credit and the Growth R&D Tax Credit. The Basic R&D Tax Credit equals 3% of QREs that do not exceed the Maryland base amount, while the Growth credit equals 10% of QREs exceeding the base amount. The Maryland base amount is calculated by dividing the aggregate QREs by Maryland gross receipts for four years before the credit year. Companies may claim up to $12 million in state tax credits.
Credits exceeding the income tax for a taxable year may be carried forward for up to seven years or until they are used. The tax credit is currently in effect through the 2025 tax year, after which the General Assembly determines if the credit will be extended.
Massachusetts’ state-level R&D tax credit equals 15% of incremental basic research payments plus 10% of QREs. If a business does not have any QREs for any of the previous three tax years, the credit is 5% of the QREs for the taxable year.
Credits are limited to 100% of an organization’s first $25,000 corporate excise tax liability and 75% of liability over $25,000. R&D tax credits cannot reduce the total tax to below the minimum amount of $456.
S corporations can apply for the research credit against their excise tax but cannot share excess credit with shareholders. Unincorporated entities such as partnerships and joint ventures that receive R&D tax credits will have credits given to the owners of these entities. Credits will be considered when determining the credit for the taxable year the entity ends.
Corporations can carry forward any credit without unlimited status for 15 years. Credits not allowed under the 75% limitation can be carried forward indefinitely.
Michigan businesses can claim a state-level R&D tax credit for QREs. The credit is 1.9% of the organization’s total QREs and, combined with the investment tax credit and compensation credit, cannot exceed 65% of state tax liability.
Minnesota’s state-issued R&D tax credit has the same definition of QRE as the federal-level credit. However, the percentage and amount of time you can carry forward unused credit differs. The credit amount is 10% of QREs up to $2 million and 2.5% above $2 million.
C corporations can carry forward credits from tax years before 2010 and after 2012. Businesses can carry forward unused credits up to 15 years. Starting from the tax year 2013, C corporations may apply the credit to any member of a corporation or business that is included in the return.
Missouri does not currently have a state-level R&D tax credit. However, Missouri is set to bring back its state-issued credit starting in the 2023 tax year. The credit will equal 15% of QREs and 20% if a Missouri university conducts the research. Credit is capped at $300,000 for a single taxpayer and $10 million for non-individuals.
Unused credits can be carried forward for up to 12 years. Further, businesses that purchase Missouri-qualified R&D equipment are exempt from state and local sales tax. The current credit provisions expire on December 31st, 2028.
Nebraska offers a state-level R&D tax credit equal to 15% of R&D expenditures in the state. If a company does business in Nebraska and another state, the amount of tax credit can be determined by taking the ratio of state QREs to total expenditures and multiplying it by the federal credit amount or apportioning the amount of credit on the federal income tax return to the state based on the average of property factor and payroll factor.
Credits can be used to receive a refund of paid state sales and uses taxes against your income tax liability or as a refundable credit.
Companies must electronically verify the work eligibility status of all new hires during the tax year in which the credit was claimed.
New Hampshire offers a state-issued R&D tax credit against business profits and business enterprise taxes. Credit is first applied to business profits tax, and any remaining amount is applied against the business enterprise tax. The credit amount is the lesser of 10% of an organization’s QREs or $50,000.
To apply for the credit, organizations must submit FormDP165 to the New Hampshire Department of Revenue Administration alongside the Federal Form 6765 no later than June 30 following the tax year the R&D activity took place. Companies may carry forward unused credit for up to five years.
New Jersey’s state-level R&D tax credit is 10% of the qualified research expenses over the base amount, plus 10% of basic research payments for the tax period.
The R&D tax credit is only available to S and C corporations. S corporation’s credits are limited to their New Jersey corporate tax liability, and pass-through of tax credits to individual shareholders is not allowed. Credit is unavailable to partnerships and other pass-through entities. Businesses can carry forward unused credits for up to seven years.
New Mexico’s R&D tax credit is the sum of all gross receipt taxes and 50% of withholding taxes. The basic credit is equal to 5% of QREs or 10% for organizations in rural areas. Companies that raise their payroll by at least $75,000 for each $1 million in QREs will qualify for an additional 5% credit. Businesses must fulfill several criteria to be eligible for the state’s R&D tax credit, including:
- Have 25 or fewer employees
- Make under $5 million in annual revenues
- R&D expenses equal to at least 20% of total expenditures for the past 12 months
After fulfilling the criteria, organizations must file Form RPD-41385 to apply for the credit within a year after the end of the year’s R&D activity was conducted. Unused credits can be carried forward up to three years after they are earned.
New York’s state-level R&D tax credit is the Excelsior Research and Development Tax Credit. The credit is 6% of QREs or 8% for qualified green projects. Excess credit is refundable and can be claimed by eligible businesses over ten years. Eligible industries include:
- Agriculture firms creating at least five net new jobs
- Back-office firms creating at least 25 net new jobs
- Distribution firms creating at least 50 net new jobs
- Entertainment companies create at least 100 net new jobs
- Financial services back-office operations creating at least 25 net new jobs
- Firms in strategic industries that make significant capital investments (other than music production and entertainment) with at least 25 employees
- Manufacturers that create at least five net new jobs
- Music production firms that create at least five net new jobs
- Scientific research and development firms creating at least five net new jobs
- Software development firms creating at least five new jobs
- Other firms creating at least 150 net new jobs and investing $3 million or more in R&D
To be eligible for state-level credit, businesses must receive a certificate of the tax credit from the Empire State Development. Suppose a business is ineligible or chooses not to participate in the Excelsior Jobs Program. In that case, an organization may be eligible to participate in the Life Sciences Research and Development Tax Credit Program.
While North Dakota’s R&D tax credit is similar to the federal version, there are a few notable differences. The tax credit is 25% for the first $100,000. For excess expenses over $100,000, the applicable percentage for tax years is 7.5% for 2007, 11% for 2008, 14.5% for 2009, and 18% for 2010-2016. For tax years after 2016, the percentage is 8%, regardless of when research begins.
Unused tax credits may be carried back three years and forward up to 15 years. Taxpayers may sell, transfer, or assign up to $100,000 of unused credit to another taxpayer if the business moving the credit is certified by the Department of Commerce Division of Economic Development and Finance to be a primary sector business with annual gross revenues of under $750,000.
Ohio’s state-level R&D tax credit equals 7% of the net excess of investment in QREs and the average investment of the previous three years of QREs. The credit is non-refundable against the Commercial Activity Tax. The state follows the Federal Alternative Simplified Calculations, which use the last three years of QREs as the base period. Credit can be carried forward for up to seven years.
Pennsylvania’s R&D tax credit is similar to the federal version, with a few notable differences. The credit is 10% of QREs and 20% if an organization is classified as a qualified small business (QSB). Pennsylvania caps its research credit at $55 million, with $11 million set aside for QSBs. Companies can choose to calculate tax credits using the regular research credit method or the alternative simplified method.
Unused state-level credits can be carried forward for up to 15 years and are non-refundable. Organizations with QRAs have until September 15th to submit an application to the Department of Revenue for the taxable year that ended in the prior calendar year.
Rhode Islanders have two state-level R&D tax credits available, Research and Development Property and Qualified Research Expenses. Both credits can be carried forward for up to seven years and may not reduce tax below Rhode Island’s minimum corporate tax.
The Research and Development Property tax credit is 10% of the cost of R&D property. Eligible properties are tangible personal property and other tangible properties, including buildings and portions of buildings used for research and development purposes. The credit cannot be used on property leased to another person or corporation.
The Qualified Research Expenses tax credit is 22.5% for QREs up to $111,111 and 16.9% for QREs exceeding base period expenses. Businesses that claim both credits must use the R&D property tax before the QRE tax credit.
South Carolina’s R&D tax credit is 5% of QREs performed in the state. Credit taken in a tax year cannot exceed 50% of the taxpayer’s liability, and any unused credit can be carried forward up to 10 years.
Texas has a state-level R&D tax credit that can offset a portion of their franchise tax or be used towards a sales tax exemption on purchasing or leasing depreciable, tangible personal property used for QRAs in the state. Sales and use tax exemption applies to activities after January 1st, 2014.
The credit amount is 5% of the excess amount of qualified research expenses in the current period over the base amount (50% of the average of three years of QREs). Private and public higher education institutes conducting QRAs are eligible for 6.25% of QREs. Unused credits can carry forward up to 20 years.
The tangible personal property where the taxpayer would have been exempt from paying sales and use tax due to the manufacturing or sale for resale exemption does not qualify for the tax credit. Organizations must choose between a sales and use tax exemption or an R&D supplies credit.
Groups that lose or gain members will have carryforward credit attributed to each member of the combined group that was included on the report of the reporting year that the carryforward relates. For example, if a member leaves, they can use carryforward credit on future franchise tax reports. The group with a membership change can only carry forward the credit on future franchise tax reports if the member(s) who received a carryforward remain part of the group until the report’s last day of the accounting period.
Utah’s R&D tax credit is equal to the following:
- 5% of an organization’s qualified spending that exceeds the base amount
- 5% of payments made to qualified organizations for basic research
- 7.5% of qualified research expenses for the taxable year
Credits calculated as 5% of taxpayer research and basic research that exceeds the tax liability can be carried forward for up to 14 years. Credit that is part of the 7.5% of QREs cannot be carried forward. All tax credits are non-refundable.
Vermont’s state-level R&D tax credit is equal to 27% of the federal credit for expenses incurred in Vermont and can be applied to personal income tax, business tax, or corporate tax. Unused credit can be carried forward for up to ten years.
Virginia’s base R&D tax credit is equal to 15% of the first $300,000 in QREs, or 20% if the expenses were part of a public or private Virginia university. The R&D credit consists of a base credit and supplemental credit available to the extent that the amount of credits granted for a fiscal year is less than the $7.7 million limit for all tax credits. If a taxpayer’s credit request exceeds $7.7 million, they will be granted a pro-rata amount of credits as determined by the Department.
Virginia companies can choose the alternative simplified credit (ASC) calculation to claim the tax credit. If an organization opts for this method, the credit is 10% of the difference between QREs of the credit year and 50% of the average QREs incurred during the previous three tax years. ASC-calculated credits are capped at $45,000.
Eligible businesses must submit the Research and Development Expenses Tax Credit (RDC Form) and include any supporting documentation to the Department no later than September 1st of the year they conducted R&D.
Wisconsin’s state-level R&D tax credit is equal to 5% (5.75% for tax years starting in 2015) of the difference between the claimant’s qualified research expenses incurred for most industries. However, some activities qualify to receive a higher percentage.
QRAs relating to designing internal combustion engines and improving their production process are eligible for a 10% credit for tax years before 2015 or an 11.5% credit if performed in 2015 or later. QRAs for improving the design and manufacturing of energy-efficient lighting systems, building automation and control systems, or batteries for hybrid and electric vehicles are eligible for a 10% credit.
R&D tax credits for activities conducted before January 1st, 2013, may only be claimed by corporations. However, QRAs performed in the tax year 2013 and later can also be claimed by individuals, partners of partnerships, shareholders of tax-option corporations, and members of limited liability companies.
Organizations must file claims for refunds within four years of the unexpected due date of the return. Businesses can carry forward and claim unused credits against Wisconsin income or franchise taxes for up to 15 years.
The following states do not have a state-level R&D tax credit, nor do they currently plan to incorporate one:
- North Carolina
- South Dakota
- West Virginia
Claiming state-level R&D tax credit can present additional challenges on top of trying to claim the federal-level credit. At MainStreet, we sort through tax credits to find the ones your company is eligible for. Contact us to start saving money today!