Enhancing Maryland’s R&D Tax Credit for Mid-Size Businesses

Executive Summary

Maryland’s research and development (R&D) tax credit offers a 10% growth credit on eligible R&D expenses (above a base amount) and is capped at $12 million per year ($3.5 million reserved for small firms).^1,2 Critically, only firms with net book assets below $5 million qualify as “small businesses” and can claim refunds of unused credits.^3,4 By contrast, companies just above this asset threshold—even if they have little or no tax liability—can only carry credits forward, receiving no immediate cash. This “cliff” creates a liquidity problem for growing firms and may discourage investment.

To address this, Maryland policymakers should consider options such as raising or revising the small-business threshold, introducing partial refunds or new refundable tiers for mid-size firms, and other liquidity mechanisms. Each option would require legislative changes and appropriate safeguards (e.g. strict documentation, audits, certification by the Department of Commerce) to prevent fraud. Although expanding refunds will reduce near-term tax revenue (initially costing the State additional credits), the long-term benefits—more R&D spending, jobs, and tax base growth—should outweigh these costs. Economists estimate that every dollar of R&D credit can spur $2–$3 in extra R&D investment.^5,6 If Maryland fails to make refunds more accessible, it risks stalling innovation growth and losing firms to other states or countries that better support scaling technology companies.

Current Maryland R&D Credit Framework and Issue

Maryland’s R&D tax credit provides a 10% credit on qualified in-state R&D expenses above a “base amount,” similar to the federal model.^2,7 The credit is refundable only for small businesses, defined as companies with net book assets under $5 million at the beginning or end of the tax year.^8,3 Under current law, any credit beyond a small firm’s income tax liability is paid as a cash refund.⁴ Non‑small firms (assets ≥ $5 million) can claim credits only up to their tax bill and must carry any excess forward for up to seven years.⁴ Thus, a “mid-size” company with, say, $6 million in assets and a large R&D credit but no taxable income would get no immediate benefit—the unused credit simply sits on the books.

This strict $5 million cutoff has two adverse effects:

1. Liquidity Disadvantage: It gives small firms a strong liquidity advantage (refund checks) that nearly identical mid-size firms lack.⁹ For example, a small company with a $60,000 credit and only $50,000 of tax due would receive a $10,000 refund, whereas a mid‑sized company in the exact same scenario gets zero cash today, carrying the $10,000 forward.⁹
2. Disincentive to Scale: It can discourage growth—firms nearing $5 million in assets might stagnate to avoid losing refundability, or they may move elsewhere after outgrowing the threshold. The Department of Legislative Services (DLS) evaluation has noted this inconsistency, urging that Maryland “consider changing the definition of a small business to be consistent with other State programs or with the federal research credit”.¹⁰

Other Maryland statutes (and federal rules) typically define small firms by annual revenues or employee count, not net book value, making the $5 million test unique and arguably outdated.¹⁰ Only firms under the $5 million asset test can get cash refunds of R&D credits; other firms get no immediate liquidity. This policy gap disadvantages mid-size innovators and serves as a direct barrier to scaling.

Policy Options to Increase Refundability

To alleviate the refund cliff, Maryland could adopt one or more of the following strategies:

1. Raise or Revise the Small-Business Threshold

Increase the asset limit (for example to $10 million) or replace it with a broader measure (such as annual gross receipts or employee count). This simple legislative change (amending Tax-General §10-721) would enlarge the pool of firms eligible for refunds. For instance, aligning the small‑business definition with a revenue cap (like the federal $5 million gross receipts rule) or SBA guidelines could more accurately target truly small innovators. DLS has recommended such alignment.¹⁰

Implementation: Amend Maryland Code and Commerce certification guidelines; require firms to document the new threshold in audited financials.

Anti-fraud safeguards: Continue requiring certified financial statements and verifications by the Department of Commerce. The Commerce Dept. already obtains balance-sheet snapshots; extending the threshold just means more firms present audited asset totals.

2. Introduce Partial Refundability for Medium Firms

Instead of an all-or-nothing test, allow a prorated or partial refund for firms modestly above the threshold. For example, create a “Tier 2” category: companies with $5–15 million in assets could receive, say, 50% (or an industry-weighted share) of their unused credit in cash. Alternatively, use a sliding scale: a firm with $6 million in assets might get 80% refundable, $8 million gets 50%, etc. (Several states use tiered rates. For example, Minnesota is phasing in partial refundability of its credit—19.2% refundable in 2025, rising to 25% in 2026–27.¹¹)

Implementation: Amend statute to authorize a second refund tier and define asset brackets. Commerce would verify asset levels.

Anti-fraud safeguards: Set a reasonable upper cap on refundable portion; require stronger documentation of R&D expenses (e.g. CPA-reviewed studies); keep the $250,000 per-company credit limit to contain payouts.

3. Allow Credit Monetization (Transfer or Offset)

Enable companies to convert unusable credits into cash through transfer or application to other taxes. For instance, permit non‑small firms to sell or transfer their credits to other Maryland taxpayers (subject to approval) or to use credits against payroll taxes or unemployment insurance contributions. Some states allow transferable credits as a safety valve for nonrefundable incentives. Alternatively, extend Maryland’s recent provision (for startups) that lets firms apply R&D credits against payroll withholding ¹² to broader classes of firms, ensuring quarterly cash flows.

Implementation: Pass legislation allowing credit purchases or new tax offsets; set a fair discount rate or require escrow.

Anti-fraud safeguards: Limit sales to in-state entities; require Commerce pre-approval and secure record-keeping; audit any transfers to ensure genuine R&D origin. The existing $250k cap and aggregate program cap ($12m) would still control total payouts.

Table 1: Summary of Policy Options for Mid-Size Refundability

Each of these options requires legislative action (amendment of Tax‑General §10-721 and related guidance) and coordination with the Department of Commerce and Comptroller’s Office for implementation. For example, Commerce’s application process (due Nov. 15) could include verifying the new asset or revenue thresholds. To deter fraud, the State should insist on rigorous R&D substantiation (payroll records, project reports) and random audits. Existing safeguards (proration when program caps are reached, $250,000 per applicant limit) remain essential.

Cost–Benefit Outlook and Economic Multipliers

Expanding R&D credit refunds will cost Maryland additional revenue in the short term. For illustration, if raising the asset test from $5M to $10M brought 50 more firms into refundability at an average refund of $20,000, the annual outlay might be on the order of $1 million. Even larger changes (e.g. partial refunds for many firms) could be several million. However, this investment can be offset by future gains. Academic studies find strong “bang for buck” from R&D incentives: each dollar of credit can induce roughly $2–$3 of new R&D spending.^5,6

Increased R&D leads to innovation, higher productivity, and new products that boost economic growth. In turn, Maryland would gain in future corporate income taxes, payroll taxes, and personal income taxes from expanded business activity and jobs. For example, one analysis noted that film credits returned $3.69 in economic output for every dollar claimed;¹³ R&D-driven industries (tech, biotech, advanced manufacturing) have similarly high multipliers.

Moreover, making refunds accessible helps retain and grow Maryland businesses. Mid‑size innovators that might otherwise relocate (or reduce R&D) will instead continue hiring and investing locally. The net effect can be self-financing: by fostering a larger, more profitable tax base, the State recovers revenue over time. In addition, by clarifying that R&D credits will be paid (rather than just carried forward), the State removes uncertainty for investors and firms, encouraging new ventures and attracting venture capital.

In summary, while there is a near-term revenue cost, framing the change as an investment in innovation yields long-run fiscal benefits. The Department of Legislative Services emphasizes that tax incentives should ultimately be judged on whether they “foster increased research activities”.¹⁴ By improving cash-flow for high-potential companies, Maryland encourages precisely that outcome.

Importance and Risks of Inaction

If Maryland does not address this gap, the State risks stalling growth of its tech and life-science sectors. The current rule creates a penalty for success: a startup that grows slightly beyond $5 million in assets suddenly loses the full R&D refund, hampering further innovation. Competing states (and the federal government via payroll-offset of credits) are moving to ease such transitions.^12,15 Failure to adapt could lead firms to relocate R&D operations to more supportive jurisdictions.

Furthermore, withholding refunds can perpetuate inequality between industries. Many high-growth sectors (e.g. biotech) require heavy capital investment and may quickly surpass $5M in assets before turning profitable. Without refunds, these firms have less cash to continue R&D, even as they create local jobs. Over time, this could dampen the very innovation ecosystems Maryland seeks to foster in clusters like Baltimore’s tech corridor or Montgomery’s biomedical zone.

In plain terms, not implementing reform means: continued liquidity constraints for budding tech firms, weaker Maryland economic development, and lost tax receipts from foregone growth. Allowing only a narrow set of companies to tap the full value of the R&D credit undermines the State’s innovation policy and may violate the original intent “to foster increased research activities”.¹⁴

Conclusion

To align Maryland’s R&D tax credit with its economic development goals, policymakers should broaden refundability beyond the $5 million asset test. Whether by simply raising the threshold, adding a mid-size refund tier, or enabling credit transferability, the State can give growing firms the liquidity needed to keep innovating. These changes require legislation and careful implementation (robust application review, audits, caps and recapture rules) to prevent misuse. In exchange, Maryland will strengthen its position as a hub for technology and science, ultimately generating more jobs and revenue. Given evidence that R&D incentives spur multiple dollars of investment per dollar of credit,⁵ the modest short-term costs can be viewed as an investment in the State’s future prosperity.

Works Cited

1. R&D Tax Credits in the U.S. Explained | Chrono, accessed July 31, 2026, https://www.chronoinnovation.com/resources/rd-tax-credits-in-the-us
2. Business Tax Credits | Research and Development | Maryland Department of Commerce, accessed July 31, 2026, https://commerce.maryland.gov/fund/programs-for-businesses/research-and-development-tax-credit
3. Business Tax Credits | Research and Development | Maryland Department of Commerce, accessed July 31, 2026, https://commerce.maryland.gov/fund/programs-for-businesses/research-and-development-tax-credit
4. Business Tax Credits | Research and Development | Maryland Department of Commerce, accessed July 31, 2026, https://commerce.maryland.gov/fund/programs-for-businesses/research-and-development-tax-credit
5. R&D Tax Credits: Driving American Innovation and Competitiveness, accessed July 31, 2026, https://www.kajmst.com/articles/r-d-tax-credits-driving-american-innovation-and-competitiveness
6. R&D Tax Credits: Driving American Innovation and Competitiveness, accessed July 31, 2026, https://www.kajmst.com/articles/r-d-tax-credits-driving-american-innovation-and-competitiveness
7. R&D Tax Credits in the U.S. Explained | Chrono, accessed July 31, 2026, https://www.chronoinnovation.com/resources/rd-tax-credits-in-the-us
8. Maryland Department of Commerce, commerce.maryland.gov, accessed July 31, 2026, https://commerce.maryland.gov/Documents/Tax%20General%2010%20721.pdf
9. Small Business (R&D Credit Definition) and Tax Insights, accessed July 31, 2026, https://www.swansonreed.com/research-tax-credit/maryland/glossary/small-business-rd-credit-definition/
10. Evaluation of the Research and Development Tax Credit, accessed July 31, 2026, https://dls.maryland.gov/pubs/prod/TaxFiscalPlan/Evaluation-of-the-Research-and-Development-Tax-Credit.pdf
11. State R&D Tax Credits: Recent Updates and Impacts – Aprio, accessed July 31, 2026, https://www.aprio.com/insights-events/state-rd-tax-credits-recent-updates-and-impacts-ins-article-tax/
12. Small Business (R&D Credit Definition) and Tax Insights, accessed July 31, 2026, https://www.swansonreed.com/research-tax-credit/maryland/glossary/small-business-rd-credit-definition/
13. Maryland General Assembly Testimony, mgaleg.maryland.gov, accessed July 31, 2026, https://mgaleg.maryland.gov/cmte_testimony/2026/bat/33639_02182026_83534-720.pdf
14. Maryland Department of Commerce, commerce.maryland.gov, accessed July 31, 2026, https://commerce.maryland.gov/Documents/Tax%20General%2010%20721.pdf
15. State R&D Tax Credits: Recent Updates and Impacts – Aprio, accessed July 31, 2026, https://www.aprio.com/insights-events/state-rd-tax-credits-recent-updates-and-impacts-ins-article-tax/