Posted April 29, 2016 at 04:39 PM

Virginia Strengthens its Research and Development Tax Credit Program

Virginia legislators have made the state’s commitment to business clear by continuing to enhance its research and development (R&D) tax credit program. New legislation (S.B. 58), which recently passed both the house and senate unanimously and was signed by Governor Terry McAuliffe, demonstrates Virginia’s intent to attract and retain high tech businesses. The improvements include extending the sunset date of the program, increasing the amount of the existing R&D credits, providing an election for an alternative method of calculation, and creating a new credit for “major research and development expenses”.

The legislation extends the program’s sunset date from its scheduled expiration of 2018 through the tax year 2021. The annual credit amount granted to all taxpayers has been increased from $6 million to $7 million and the per-taxpayer credit cap has been increased as well. Businesses engaging in qualified R&D activities within the state may now claim the following:

Taxpayers may now elect to use an alternative computation method for the existing credit. The new method allows an amount equal to 10 percent of the difference between Virginia qualified research and development expenses (QREs) paid or incurred during the taxable year and 50 percent of the average Virginia QREs paid or incurred for the 3 taxable years immediately preceding the taxable year. If the taxpayer did not pay or incur Virginia QREs in any one of the 3 preceding years, the credit will equal 5 percent of the Virginia QREs during the relevant taxable year. The maximum credit allowed under the alternative computation is the same as for the standard computation.

The legislation also establishes a new R&D tax credit beginning with the taxable year 2016 for taxpayers with major research and development expenses (defined as Virginia R&D expenses exceeding $5 million). The new credit is calculated in the same manner as the alternative computation described above. However, the new R&D credit is not refundable and has no cap on the maximum per-taxpayer credit. The state may grant up to $20 million in tax credits each fiscal year beginning with fiscal year 2017. If credit applications received exceed $20 million, Virginia will award the credits on an apportioned basis. Although there is no per-taxpayer cap, the credit is limited to 75 percent of the taxpayer’s Virginia income tax liability for the year. Any unused credit for the year may be carried forward for up to 10 years.

Taxpayers may not claim both the existing R&D credit and the new R&D credit in the same taxable year. The credit is not permitted for expenses incurred for research using embryonic stem cells.