The Maryland Research and Development Tax Credit: Understanding the Controlled Group and Single Taxpayer Rule

The Controlled Group of Corporations (Single Taxpayer Rule) requires all businesses under common ownership to be treated as one entity when calculating the Maryland Research and Development tax credit. This consolidation ensures that the statutory caps and credit thresholds are applied fairly across an entire organization rather than being duplicated by individual subsidiaries. 1

The application of the Single Taxpayer Rule represents a critical intersection between Maryland state tax law and the federal Internal Revenue Code (IRC). By mandating that affiliated entities operate as a single unit for tax credit purposes, the state effectively prevents the fragmentation of research activities to circumvent the annual $250,000 individual applicant cap or to manipulate the calculation of the Maryland Base Amount. 4 For tax professionals and corporate executives, a nuanced understanding of these rules is paramount, as failure to properly aggregate entities can lead to the disqualification of credits, significant audit adjustments, and the loss of refundable benefits for qualifying small businesses. 5 This report explores the legal definitions, mechanical calculations, and administrative guidance surrounding the rule, providing a comprehensive framework for compliance and strategic tax planning within the State of Maryland. 2

Legal Framework and Statutory Definitions

The Maryland Research and Development (R&D) tax credit is governed by § 10-721 of the Tax–General Article of the Annotated Code of Maryland. 1 Within this statute, the state explicitly adopts the federal definition of a “controlled group of corporations” as set forth in § 41(f) of the Internal Revenue Code. 2 This legislative bridge ensures that Maryland’s treatment of affiliated companies remains consistent with federal standards while adapting the benefit to the specific economic landscape of the state. 3

Integration of Internal Revenue Code Section 41(f)

The primary mechanism for the Single Taxpayer Rule is the requirement that all members of the same controlled group of corporations be treated as a single taxpayer. 2 This definition extends beyond simple parent-subsidiary relationships to include any trades or businesses, whether incorporated or not, that are under common control. 6 Under federal guidelines adopted by Maryland, a controlled group generally exists in three forms: parent-subsidiary, brother-sister, and combined groups. 5

For the purposes of the R&D credit, the threshold for control is often set at a greater than 50% ownership level, rather than the 80% threshold used for consolidated return filings. 5 This lower threshold expands the net of the Single Taxpayer Rule, catching a broader range of affiliated entities that might otherwise attempt to claim the credit independently. 5

Maryland Regulatory Framework and COMAR

The Comptroller of Maryland and the Department of Commerce provide further clarification through the Code of Maryland Regulations (COMAR). Specifically, COMAR 24.05.12.12 and COMAR 03.04.10.09 codify the treatment of affiliated corporations. 13 These regulations dictate that all members of a controlled group are treated as a single taxpayer. 2 Furthermore, the credit is calculated at the group level based on aggregate Maryland Qualified Research Expenses (QREs), and the resulting credit is then allocated back to individual members based on their proportionate share of the expenses that gave rise to the credit. 4

Under COMAR 03.04.10.01, the “Maryland base amount” is derived from federal IRC § 41(c) definitions but is strictly limited to Maryland-sourced data. 1 This means the fixed-base percentage and average annual gross receipts must reflect only activity “reasonably attributable to the conduct of a trade or business in the State.” 2

Mechanics of the Single Taxpayer Rule

The Single Taxpayer Rule fundamentally changes how a business approaches the Maryland R&D credit by moving the unit of analysis from the legal entity to the economic group. 2 This aggregation has profound effects on the two most critical components of the credit: the calculation of the incremental growth and the application of statutory caps. 4

Aggregation of Expenses and Receipts

The first step for a controlled group is the aggregation of all Maryland QREs and Maryland Gross Receipts (MGR) across all members. 5 This aggregate data is used to calculate a single Group Credit. 2 This process eliminates the potential for a group to shift expenses between entities to take advantage of an entity that might have a lower historical base. 2

The Maryland Base Amount for a group is determined by a series of calculations. First, the group must determine the average Maryland QREs for the four preceding years for all group members combined. 2 Second, it must calculate the average MGR for the four preceding years for all group members combined. 2 Third, it determines the Fixed-Base Percentage, which is the ratio of aggregate prior QREs to aggregate prior MGR. 4 Finally, the aggregate average MGR is multiplied by the Fixed-Base Percentage to arrive at the Group Base Amount. 4

The $250,000 Cap Per Single Applicant

One of the most significant implications of the Single Taxpayer Rule is the application of the individual applicant cap. Maryland law prohibits the Department of Commerce from approving a tax credit for any single applicant in an amount exceeding $250,000. 1 Because all members of a controlled group are treated as a single taxpayer, the $250,000 limit applies to the group as a whole, not to each individual corporation within the group. 1

This rule is a powerful anti-abuse measure. Without it, a large multinational corporation with ten Maryland-based subsidiaries could potentially claim $2.5 million in credits ($250,000 x 10). 2 Under the Single Taxpayer Rule, those ten subsidiaries are capped at a combined $250,000, ensuring that a larger portion of the $12 million total fund remains available for other unrelated businesses. 2

Proportionate Allocation of the Credit

Once the Department of Commerce certifies the total credit amount for the controlled group, that amount must be distributed among the members. 13 The credit allowable to each member is determined by multiplying the total group credit by a fraction where the numerator is the Maryland QREs incurred by that specific member and the denominator is the total Maryland QREs incurred by all members of the controlled group combined. 2

This ensures that the tax benefit follows the actual economic activity. If Subsidiary A performed 80% of the group’s research in Maryland, Subsidiary A is entitled to 80% of the group’s certified credit. 2 This allocation is based on year-end membership and does not follow a day-count proration rule, which simplifies the administrative burden for groups with frequent mid-year entity acquisitions. 5

Growth Credit Calculation and Maryland Base Amount

Since the repeal of the Basic Credit in 2021, the Growth Credit is the only available avenue for Maryland R&D tax incentives. 18 The Growth Credit is strictly incremental, rewarding companies for research spending that exceeds their historical average in the state. 1

Determining Maryland QREs

Maryland follows the federal definition of QREs found in IRC § 41(b), but with a strict geographical limitation. 3 Expenses only qualify if they are incurred for research conducted “in the State.” 4

• Wages: Salaries paid to employees for performing, supervising, or supporting qualified research activities within Maryland. 7
• Supplies: Tangible property (other than land or improvements) used in the conduct of qualified research in Maryland. 7
• Contract Research: 65% of any amount paid to a person (other than an employee) for qualified research performed in Maryland. 7

The Department of Commerce and the Comptroller jointly prescribe standards to determine the location of research. 1 Factors considered include the location where services are performed, the residence of the researchers, and where supplies are consumed. 1

The Base Amount Formula

The Maryland Base Amount serves as the floor for the Growth Credit. For a typical business, the formula is:

$$\text{Maryland Base Amount} = \text{Fixed-Base Percentage} \times \text{Average Annual Maryland Gross Receipts}$$

4

Where the Fixed-Base Percentage is:

$$\text{Fixed-Base Percentage} = \frac{\sum \text{Maryland QREs (Prior 4 Years)}}{\sum \text{Maryland Gross Receipts (Prior 4 Years)}}$$

4

For startups or businesses with fewer than four prior years of activity, the calculation is adjusted to reflect only the years the business was in existence. 4 If a firm did not invest in R&D prior to the credit year, the Maryland Base Amount is zero, allowing the company to claim a full 10% credit on all Maryland QREs, subject to caps and proration. 4

Partial and Short Tax Years

Maryland law requires specific adjustments for taxpayers operating for less than a full 12-month period. 2 The Maryland Adjusted Base Amount is the standard base amount multiplied by a fraction representing the number of days in the short year divided by 365. 4 This ensures that the base threshold is proportional to the abbreviated research period. 4

Small Business Provisions and Asset Aggregation

The Maryland R&D credit program provides significant enhancements for small businesses, primarily through refundability. 1 However, the Single Taxpayer Rule plays a decisive role in determining which companies qualify for this status. 3

The $5 Million Asset Test

A small business is defined as a for-profit corporation, LLC, partnership, or sole proprietorship with net book value assets totaling less than $5 million at the beginning or the end of the taxable year. 3 The 2021 legislative changes formally defined “net book value assets” as the total value of assets (including intangibles) minus liabilities, depreciation, and amortization. 7

Crucially, the Single Taxpayer Rule applies to this asset test. 7 All members of a controlled group are treated as a single taxpayer for purposes of applying the $5 million asset threshold. 7 If a parent company has $10 million in assets but its R&D-performing subsidiary has only $1 million, the subsidiary is not considered a small business because the group’s aggregate assets exceed the $5 million limit. 7

Refundable Benefits

The classification as a small business is highly consequential because it determines the liquidity of the credit. Small businesses can claim a refund for any credit amount that exceeds their state income tax liability. 1 Non-small businesses, by contrast, must carry forward unused credits for up to seven years. 1 This refundability is often the primary driver of participation for early-stage biotechnology and technology firms that are not yet profitable. 7

Proration and the $12 Million Statewide Cap

The Maryland R&D credit is heavily oversubscribed, meaning that the total volume of credits applied for by all Maryland businesses routinely exceeds the $12 million allocated by the General Assembly. 4

Funding Tiers

Following the 2021 reforms, the $12 million fund is split into two distinct pools to protect small businesses from competition with larger firms. 1

If applications within a pool exceed the allocated amount, the Department of Commerce must prorate the credits for all applicants in that pool. 1 This means a company might apply for a $200,000 credit but only be certified for a fraction of that amount. 2

Oversubscription Trends

Historical data highlights the dramatic impact of oversubscription. In the 2019 tax year (reported in 2020), businesses reported $2.645 billion in Maryland QREs and applied for roughly $117.5 million in total credits. 25 Because of the $12 million cap, the effective rates were reduced from 3% to 0.26% for basic credits and from 10% to 1.18% for growth credits. 25

More recent data for the 2020 tax year shows continued pressure, with 385 applications and $1.8 billion in certified Maryland R&D expenses. 27 The basic credit was prorated at approximately 12.5% and the growth credit at approximately 6.1%. 27 These figures underscore the necessity for controlled groups to accurately calculate their aggregate base amount, as even small errors are magnified by the proration process. 4

Administrative Guidance and Local Revenue Rules

The Maryland Comptroller’s Office provides specific administrative guidance on how these credits integrate with the general corporate income tax filing process. 28 Understanding these procedural rules is essential for ensuring that certified credits are successfully claimed. 28

The Add-Back Modification

Maryland law requires a specific adjustment to taxable income when an R&D credit is claimed. 19 To prevent a double benefit, taxpayers must add back the amount of the credit claimed to their federal adjusted gross income (for individuals) or federal taxable income (for corporations) to arrive at Maryland modified income. 19

$$\text{Maryland Modified Income} = \text{Federal Taxable Income} + \text{Maryland R&D Credit Claimed}$$

19

This addition modification effectively reduces the net value of the credit by the taxpayer’s marginal tax rate. For a corporation paying Maryland’s 8.25% corporate tax, a $100,000 credit essentially provides a net benefit of $91,750 after the add-back. 19

Maryland Gross Receipts Definition

A critical component of the base amount calculation is the determination of Maryland Gross Receipts. 2 COMAR 03.04.10.01(B)(8) defines these as gross receipts reasonably attributable to the conduct of a trade or business in the State, as determined under the apportionment rules in COMAR 03.04.03.08. 9

For controlled groups, the consistency of this definition is vital. Each member must calculate its receipts using these standard apportionment principles before they are aggregated for the group’s single taxpayer calculation. 7

Corporate Restructuring and Mergers

The treatment of the R&D credit during mergers, acquisitions, and dispositions is another area where the Single Taxpayer Rule and federal conformity are paramount. 2

Succession of Credits

Maryland follows federal law (IRC § 41(f)(3)) regarding the impact of acquisitions and dispositions. 2

• Stock Purchases: If an entity is acquired via a stock purchase, its historical QREs and gross receipts follow the entity into the new controlled group. 7
• Asset Purchases: If only assets are purchased, the R&D credits generally remain with the selling legal entity and do not transfer to the buyer. 2

In transactions involving an asset purchase, unused credits do not transfer from the target company to the purchaser; they remain with the target company. 2 Furthermore, unused credits may not be sold or purchased as standalone tax attributes. 2

Adjusting the Base Amount

When a controlled group acquires a new member, the group’s Maryland Base Amount must be adjusted. 2 The historical QREs and gross receipts of the acquired entity must be integrated into the group’s prior-year averages as if the entity had always been a member. 2 Failure to perform this adjustment is a common error in R&D credit studies and can lead to inflated claims that are vulnerable to audit. 5

Application Procedures and Deadlines

Claiming the Maryland R&D credit is a multi-step process that requires coordination between the company, the Department of Commerce, and the Comptroller. 1

Certification Timeline

The Maryland R&D credit operates on a look-back certification cycle. Businesses must apply for the credit by November 15 of the calendar year following the end of the taxable year in which the expenses were incurred. 1 For example, expenses incurred in the 2024 tax year must be applied for by November 15, 2025. 4

The Department of Commerce reviews these applications and issues a tax credit certification letter by February 15 of the following year. 4 Once the certification is received, the taxpayer must file an amended income tax return for the year the research was performed to claim the credit. 1

Required Documentation

The application process is rigorous, requiring detailed evidence of qualifying activity. 7

• Project Lists: Identification of all business components to which the research relates. 11
• Cost Breakdowns: Accurate tracking of wages, supplies, and contract research expenses. 7
• Federal Alignment: A copy of Federal Form 6765 must be attached to the Maryland application. 5
• Asset Proof: For small businesses, financial statements or tax returns are required to verify the $5 million asset limit. 4

The One Big Beautiful Bill Act (OBBBA) and Federal Interaction

Recent changes in federal tax policy, specifically the requirement to capitalize R&D expenses under IRC § 174, have created new complexities for the Maryland R&D credit. 32

Restoration of R&D Expensing

The Tax Cuts and Jobs Act (TCJA) of 2017 required businesses to capitalize and amortize domestic research expenses over five years, beginning in 2022. 32 This change significantly increased the taxable income for innovative firms. 32

However, the Maryland One Big Beautiful Bill Act (OBBBA), enacted in 2025, restored the ability of businesses to immediately expense domestic R&D expenditures starting with the 2025 tax year. 32 For eligible small businesses (those with average annual gross receipts under $31 million), this restoration applies retroactively to the 2022-2024 tax years. 32

Impact on Controlled Groups

The OBBBA’s $31 million small business threshold also incorporates controlled group aggregation rules. 12 This means that a subsidiary may only take advantage of retroactive expensing if the entire controlled group’s aggregate receipts remain under the $31 million limit. 12 This consistency across state tax policy ensures that the Single Taxpayer Rule remains the primary lens through which Maryland evaluates business incentives. 5

Practical Example: Multi-Entity Controlled Group

To illustrate the Single Taxpayer Rule in action, consider a controlled group consisting of “BioTech Parent” and its two subsidiaries, “Alpha Lab” and “Beta Research,” all operating in Maryland.

Step 1: Aggregate Data Collection

Step 2: Base Amount and Raw Credit Calculation

• Group Fixed-Base Percentage: $600,000 / $12,000,000 = 5%$. 4
• Group Base Amount: $5% \times $12,000,000 = $600,000. 4
• Excess QREs: $2,500,000 – $600,000 = $1,900,000. 1
• Raw Growth Credit (10%): $1,900,000 \times 10% = $190,000. 1

Step 3: Application of the Single Taxpayer Rule

Because the raw credit of $190,000 is under the $250,000 group cap, the full amount is certified, subject to statewide proration. 1 If we assume a 10% proration rate due to oversubscription:

• Certified Group Credit: $190,000 \times 10% = $19,000. 2

Step 4: Allocation to Members

• Alpha Lab Share: ($1.5M / $2.5M) x $19,000 = $11,400. 4
• Beta Research Share: ($1.0M / $2.5M) x $19,000 = $7,600. 4

Even though “BioTech Parent” incurred no research expenses, it remains part of the group for the base amount calculation but receives no allocation of the final credit. 5

Conclusion: Strategic Takeaways for Corporations

The Maryland Research and Development tax credit offers a robust financial incentive for innovation-driven enterprises, but its complexity demands a group-wide perspective. The Single Taxpayer Rule is not merely a technicality; it is the structural foundation of the program. 1 Corporations must ensure that they are not filing fragmented applications that overlook the aggregation of QREs and receipts, as such errors can lead to the loss of significant tax attributes during an audit. 5

Furthermore, the recent shifts in both federal and state law—particularly the OBBBA and the repeal of the Basic Credit—place an even greater emphasis on the incremental Growth Credit. 18 Businesses should focus on meticulous recordkeeping and contemporaneous documentation to support their 10% growth claims, especially in a environment where oversubscription leads to significant proration. 7 By aligning their internal R&D tracking with the specific requirements of COMAR and IRC § 41(f), Maryland businesses can effectively navigate the Single Taxpayer Rule to optimize their cash flow and continue fueling the state’s innovation economy. 7

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