Posted February 24, 2016 at 04:52 PM
Beginning with the 2014 tax year, Virginia legislators made several changes to the state’s research and development (R&D) credit program. Virginia rewards business for pursuing scientific or technical research that creates or improves products and processes. The bottom-line savings can significantly improve the return on R&D investments. In order to be eligible, the R&D must involve a systematic study or be directed towards discovering new information that is scientific or technical, and must relate to developing a new product or process or improving the performance, quality or reliability of an existing product or process.
Launched in 2011, Virginia’s program allows an income tax credit to businesses for qualified R&D expenses for taxable years beginning on or after January 1, 2011, but before January 1, 2019. Taxpayers engaged in activities that qualify under the federal R&D credit criteria (with the exception of human embryonic stem cell research) are also eligible for the Virginia state income tax credit, provided they obtain pre-certification. Unlike the federal credit, the Virginia credit is refundable, which makes it available to eligible companies operating at a loss.
Expanded Credit Allocation Amount and Increased Per Taxpayer Credit Cap
Beginning with the 2014 tax year, Virginia increased the amount of the annual credit allocation to qualified businesses from $5 million to $6 million. If total eligible credit requests exceed the $6 million credit cap for all credits, each taxpayer will be granted a pro rata amount of credits.
Additionally, Virginia has increased the annual per taxpayer credit cap. Businesses engaging in qualified R&D activities within the state can now claim 15% of the first $234,000 of Virginia qualified R&D expenses (after exceeding a base amount). The 2011 – 2013 credit cap amount was $167,000. This effectively increases the credit from approximately $25,000 to $35,000. For qualified expenses related to research conducted in conjunction with a Virginia public or private college or university, businesses can claim 20% of the $234,000 after the base amount.
Election for Pass-Through Entities to Claim Credit at Entity Level
Effective for the 2014 tax year, Virginia also established an election for pass-through entities (e.g., partnerships, limited liability companies, and S Corporations) to claim the credit at the entity level rather than having the credit allocated to the entity’s owners. To do so, the pass-through entity must make the election on Form PTE and enter the amount of credit available on Form 502.
Credit Application Process Now Requires Additional Information
Eligible businesses must apply for the credit by April 1, 2016 in order to meet the pre-certification requirement for the 2015 tax year. Virginia strictly enforces this annual deadline. Eligible taxpayers must submit Form RDC along with supporting documentation to the Virginia Department of Taxation.
All applications are reviewed for completeness and taxpayers are notified of any errors by June 1. If additional information is required, it must be provided to the Department no later than June 15 to be considered for the credit. All eligible taxpayers will be notified by June 30 as to the amount of credits that they may claim.
Taxpayers may also be required to submit additional documentation to the Department upon request.