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Immediate Action Required by April 1 – Refundable Tax Credit for Virginia Research and Development Costs


 

 

3/12/2013
 
Synopsis:
 
Taxpayers with qualifying expenses must apply by April 1 in order to qualify for a refundable tax credit against corporate and personal income tax for certain research and development expenses conducted in Virginia.  The maximum credit per taxpayer is approximately $25,000 and is capped at $5,000,000 of credit state-wide for each fiscal year. 
 
Suggested Action:
 
Please contact a CohnReznick tax professional to determine whether and how to file for this Virginia tax credit.
 
Issue:
 
For tax years beginning before January 1, 2016, Virginia grants a refundable tax credit for qualified research and development (R&D) expenses conducted in Virginia. 
 
Background - Federal R&D Guidance:
 
Generally, “qualified research and development expenses” are defined by Internal Revenue Code Sections 41(b) and (d) as “qualified research expenses.”  Qualified research expenditures under Internal Revenue Code Section 41 include:
 
  1. Wages paid to an employee engaged in qualified research or in the direct supervision of qualified research.
  2. Amounts paid for supplies used in the conduct of qualified research, and
  3. Amounts paid for the use of computers for the conduct of qualified research.
  4. Contract research expenses are 65% of amounts paid to persons other than employees for qualified research (75% for payments made to a qualified research consortium).

 

Qualified research is research and development conducted in the experimental or laboratory sense that meets the following tests:

  1. Expenditures must qualify under IRC Section 174 (generally defined under IRS Treasury Regulation 1.174-2 as research conducted in experimental or laboratory sense).
  2. The research must be undertaken to discover information that is technological in nature (i.e. must rely on the principles of physical, biological, engineering, or computer sciences).
  3. Substantially all of the research must contain elements of a process of experimentation relating to a new or improved function, performance, reliability, or quality.
  4. The application of the research is intended to be useful in the development of a new or improved business component (any product, process, technique, formula, or invention) of the taxpayer.
 
Virginia R&D Credit:
 
Statewide, the pool of money available for the Virginia R&D credit is capped at $5,000,000. The credit is 15% of the first $167,000 of qualified research and development expenses over a base amount paid or incurred during the tax year.  If the research was conducted in conjunction with a Virginia college or university (public or private), the credit amount increases to 20% of the first $175,000 of qualified expenses. If the credit amount awarded exceeds the taxpayer’s Virginia liability, the excess credit is refunded.
 
Before claiming the credit, a taxpayer must apply to the Virginia Department of Taxation. The application form and supporting schedules are due April 1. The application form includes a calculation of the amount of credit to which the taxpayer may be entitled. If the total amount of approved credits to all taxpayers exceeds $5,000,000, credits will be awarded on a pro rata basis. If the total is less than $5,000,000, the Department will allocate the excess to approved taxpayers.
 
Other State Tax Credits:
 
Florida also provides an R&D credit against corporate income tax for a “target industry business” claiming a federal R&D credit. These credits are limited to $9,000,000 each tax year and credits will be awarded in the order in which completed applications are received. The credit application process is similar to that of Virginia. Taxpayers should electronically file the application for the credits as soon as possible.
 
Contact:
 
For more information, please visit the CohnReznick State and Local Tax webpage and contact:
 
Patrick Duffany, Partner and National Director of State and Local Tax Services, at 860-368-3607; or
Harry Tuul, Senior Manager, State and Local Tax Services, at 703-744-6720; or
Doug Finkle, Senior Manager, Research and Development Credit, at 973-364-7832.
 

 

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

 
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

 

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