Advanta Tax Advisors Driving Improvements to Georgia R&D Tax Credit - Advanta Tax Advisors, LLC

Advanta Tax Advisors Driving Improvements to Georgia R&D Tax Credit

  Posted November 03, 2017 at 10:30 AM

Advanta Tax Advisors Driving Improvements to Georgia R&D Tax Credit

Georgia companies are growing out of a state tax incentive enacted to encourage innovation.  Advanta Tax Advisors noticed that some of its clients with significant research spending in Georgia were unable to take advantage of the Georgia Research Tax Credit.  The reason:  rapid growth.  Due to the current structure of the credit’s calculation, large increases in Georgia sales cause a business to lose the Georgia Research Tax Credit.  The state should be encouraging growth and innovation as well as encouraging established companies to expand in Georgia.  This method of calculating the credit does not provide that incentive. 

Many states enacted research credits closely following the federal research tax credit.  A company received a federal research credit based on a calculation measuring growth of R&D spending as a percentage of gross receipts.  Congress structured the credit in this manner to encourage companies to budget more research credit as a percentage of gross receipts in each subsequent year.  The federal law changed in 2007 to allow a business to elect an Alternative Simplified Credit based only on the trend of R&D spending and removed gross receipts from the determination.  This was done to simplify the credit calculation as well as to acknowledge that sales growth should not be a factor in decreasing benefits for innovation.  A few years of significant revenue growth would not preclude a company from receiving the benefit of the federal research tax credit.

States have slowly adopted similar calculation methods basing the state research credit on the increase in research spending over a period of three or four prior years.  Some states have enacted this alternative calculation as an election a business may make so that gross receipts will not impact the benefit. 

The current Georgia Research Tax Credit is calculated as follows:

Georgia research expenses for current year


Less:      Base Amount of:

 (Georgia Research Expenses for prior 3 years)  / 3     x  Current Year Gross Receipts

Georgia Gross Receipts for prior 3 years

X            10%

      =             Georgia available research credit

The proposal is to add the following Alternative Simplified Credit Method as an option for Georgia taxpayers:

Georgia research expenses for current year

Less:      Georgia research expenses for prior three years/6

X            7%

=            Georgia available research credit

The pattern of the federal credit is followed, evaluating the increase in current year spending over 50% of the prior three-year average R&D spending. 

Below is the fact pattern for one of Advanta’s clients with R&D operations in Atlanta:

Current Georgia Research Credit Calculation

Qualifying Georgia research expenses                                       $6,564,203

Less Base Amount of

(Georgia Research Expenses Prior 3 years $17,173,343   / 3  x Current year gross receipts

Georgia Gross Receipts Prior 3 years $96,013,177 )                        $41,444,172


Base amount                                                                                  $7,459,951


Current year spending does not exceed the base amount so the credit is 0.


The proposed Alternative Simplified Credit Option:

Qualifying Georgia research expenses                                $6,564,203

Less:  Base amount of

Georgia Research Expenses Prior 3 years $17,173,343      $2,862,224


Incremental Research Expenses                                           $3,701,979

                                                                                                       X        7 %

Georgia Research Credit                                                                      $   259,139


Studies have shown that states with research tax credits experience an increase in investment and jobs. 

Advanta is working to advance the proposed changes to the Georgia research credit by educating legislators on how the current system is affecting innovation and the companies driving it in Georgia.  Georgia can use the research credit to attract innovative companies and the high-paying, technical jobs that accompany them.  For example, Georgia is aggressively courting Amazon to locate its second headquarters, HQ2, in the state. Amazon has indicated that it will house a large research and development center at HQ2.  However, with Amazon’s high sales and growth rate, they are not likely to qualify for Georgia’s innovation inventive.  This is a big advantage to the other states vying to attract this headquarters and its 50,000 jobs.    Georgia is ranked the number one state to do business by Site Selection magazine.  An improved, robust research tax credit will help Georgia maintain its competitive business climate.