Strategic Monetization of the Massachusetts Research and Development Tax Credit: The 90% Refundable Balance Provision

The 90% of Balance (Refundable Portion Limit) is the statutory mechanism allowing certified life sciences companies to convert unused research credits into immediate cash liquidity by forfeiting 10% of their value. This provision defines the “balance” as the residual credit amount remaining after all mandatory liability offsets and statutory caps—specifically the $25,000 and 75% excise rules—have been applied.1

The Massachusetts research and development (R&D) tax credit landscape is fundamentally bifurcated between the standard corporate community and the high-innovation life sciences sector. For the vast majority of corporations, the research credit under Massachusetts General Laws (M.G.L.) Chapter 63, Section 38M, functions as a non-refundable carryforward asset, providing a dollar-for-dollar reduction of corporate excise liability but offering no immediate relief if the credit exceeds the tax due.3 However, the enactment of the Massachusetts Life Sciences Act introduced a transformative elective feature: the ability for certified entities to monetize their “available excess credits”.4 This report provides an exhaustive technical analysis of the “90% of Balance” rule, its regulatory origin in the Technical Information Releases (TIRs) of the Department of Revenue (DOR), and its strategic application for emerging biotechnology and pharmaceutical firms.

The Legislative and Regulatory Framework of Section 38M

To understand the 90% refundable portion, one must first master the underlying mechanics of the standard Massachusetts research credit. The credit closely parallels the federal research credit available under Section 41 of the Internal Revenue Code (IRC) as it existed on August 12, 1991, but with several critical Massachusetts-specific nuances.6 The primary statute, M.G.L. c. 63, § 38M, establishes that a business corporation is entitled to a credit against its excise for qualified research expenses (QREs) conducted within the Commonwealth.3

The credit is calculated as the sum of 10% of the excess of Massachusetts QREs over a base amount, plus 15% of basic research payments.3 Alternatively, since 2015, taxpayers have been permitted to elect the Alternative Simplified Method (ASM), which mirrors the federal calculation under IRC § 41(c)(5).7 Under the ASM, the credit is 10% of the current year’s QREs that exceed 50% of the average QREs for the three preceding years.8

The choice between the traditional method and the ASM is a foundational step in determining the eventual “balance” that may be eligible for a refund. For many life sciences startups with rapidly increasing R&D expenditures, the ASM often yields a higher generated credit amount, thereby increasing the potential pool of refundable capital.3

Defining “Qualified” for the Balance Calculation

The “balance” eligible for refund is only as valid as the underlying expenses. Massachusetts requires that 100% of the research activity generating the credit take place within the state’s borders.3 This includes wages paid for qualified services, the cost of supplies used in Massachusetts, and 65% of contract research expenses attributable to Massachusetts-based research facilities.9 Guidance under 830 CMR 63.38M.1 further clarifies that if services or property are used both inside and outside the state, the expenses must be strictly prorated based on the ratio of days the service provider or property was physically employed in Massachusetts.11 These rigorous documentation requirements mean that the “balance” reported on a tax return is often subject to intense audit scrutiny before a refund is issued.3

The Mandatory Liability Caps and the Genesis of the “Balance”

The most complex aspect of the “90% of Balance” rule is the technical definition of what constitutes a “balance.” In the Massachusetts corporate excise system, credits are not applied freely; they are governed by mandatory caps that prevent a corporation from eliminating its tax liability entirely, except in very specific circumstances.3

Under M.G.L. c. 63, § 38M(d), the research credit—whether calculated via the traditional method or ASM—is limited in two primary ways. First, it cannot reduce the corporate excise to less than the statutory minimum tax of $456.3 Second, the credit is subject to the “25/75 rule.” This rule dictates that a taxpayer may use the credit to offset 100% of the first $25,000 of its corporate excise liability, but only 75% of any excise liability exceeding $25,000.3

The Technical Interaction of Caps

Consider a corporation with a $125,000 excise liability and $200,000 in generated R&D credits. The standard application would be as follows:

• Offset 1: $25,000 (100% of the first $25,000).
• Offset 2: $75,000 (75% of the remaining $100,000).
• Total Credit Used: $100,000.
• Remaining Excise Due: $25,000.
• Unused Credit Balance: $100,000 ($200,000 total – $100,000 used).

In this standard scenario, the $100,000 unused credit is a “trapped” asset. The $25,000 in remaining excise due because of the 75% rule can be carried forward indefinitely, while other unused portions carry forward for 15 years.3 For a certified life sciences company, however, this $100,000 is the “balance” that triggers the potential for a 90% refund.1

The Life Sciences Tax Incentive Program (MLSC) Authorization

Refundability is not a right granted by operation of law simply because a company conducts research; it is an annual discretionary award granted through the Massachusetts Life Sciences Center (MLSC).13 This multi-agency oversight ensures that the Commonwealth’s fiscal resources are directed toward firms that contribute significantly to the state’s economic ecosystem.

Certification and Application Process

Before a company can calculate its “90% of balance,” it must be certified by the MLSC.13 This requires registering to do business in Massachusetts, filing a 2024 (or current year) return, and maintaining at least 10 permanent full-time employees (FTEs) who work at least 35 hours per week.13 Furthermore, applicants must commit to specific job creation and retention targets.14

The MLSC runs an annual solicitation, such as the 16th round which opened in late 2024 and closes in early 2025.15 In 2024, the program’s annual authorization limit was increased from $30 million to $40 million, reflecting the high demand for these liquidity-generating incentives.13 Once a company is accepted, it receives a Tax Incentive Agreement specifying a “Gross Award Amount”.2 This award serves as the absolute ceiling for the refundable calculation.2

The “Lesser Of” Rule

Revenue guidance provided in Technical Information Release (TIR) 13-6 is the definitive source for calculating the refund.2 The “90% of Balance” rule is constrained by the company’s specific MLSC award. The actual refund a taxpayer receives is the lesser of:

1. 90% of the gross award amount authorized in the Tax Incentive Agreement; or
2. 90% of the balance of available excess credits after reducing the current year’s tax liability as much as possible.2

This “lesser of” mechanic ensures that even if a company has a massive “balance” of $5 million in R&D credits, if the MLSC only authorized a $500,000 refund, the company can only monetize that $500,000 portion.2 Conversely, if the MLSC authorizes a $1 million award but the company only has a “balance” of $100,000 in excess credits, the refund is limited to 90% of that $100,000.2

Administrative Guidance: Analysis of TIR 08-23 and TIR 13-6

The Massachusetts Department of Revenue has issued several key documents that bridge the gap between the corporate excise statute (§ 38M) and the Life Sciences Act.

TIR 08-23: The Original Directive

TIR 08-23 clarified that for tax years beginning on or after January 1, 2009, certified life sciences companies could elect a refund of their research credits.4 This guidance established the “90% haircut” rule—meaning that while the state allows the refund, it retains 10% of the credit’s value as a form of administrative “toll” or to discourage companies from liquidating credits that they might have used to offset future taxes at 100% of their value.4

TIR 13-6: The Computation and Recapture Mandate

TIR 13-6 provided the granular math required for compliance and, crucially, the rules for “decertification”.2 If a company fails to meet its job creation targets, the MLSC can revoke its certification, triggering a “recapture” of any refunds previously issued.5 TIR 13-6 explains that the recaptured refund is treated as a tax due in the year of decertification.5

A pivotal insight from TIR 13-6 is that a decertified company cannot use its existing non-refundable R&D credit carryforwards to offset the recapture tax liability.5 This creates a significant risk profile for companies that aggressively monetize their “balance” but fail to scale their workforce as promised.

Filing Requirements and Documentation: Schedule RC, CMS, and RLSC

To successfully claim the 90% refund, a corporation must navigate a sequence of forms that report the generation, use, and liquidation of the credit.

Schedule RC: Research Credit Calculation

Every corporation claiming an R&D credit must first file Schedule RC (or the draft 2025 Schedule RC).7 This form is used to determine the total credit generated in the current year using either the traditional method or the Alternative Simplified Method.7 It also calculates the $25,000 and 75% limitations.7

Schedule RLSC: The Refundable Life Science Credit

Schedule RLSC is the specific form where the “90% of balance” calculation takes place.18 Part 1 of the form requires the taxpayer to show how much credit was used to reduce the tax due.18 Part 2 is the “Refunds Authorized by the MLSC” section, where the taxpayer identifies the excess credits remaining (the “balance”) and applies the 90% factor.18

Schedule CMS: The Credit Manager Schedule

Schedule CMS serves as the master reporting schedule for all Massachusetts tax credits.20

• Section 1: Reports credits taken to offset the current tax liability.21
• Section 2: Reports refundable credits for which a cash payment is requested.19

In Section 2, the taxpayer must explicitly enter the amount by which the available credit balance is being reduced and the amount to be treated as a refundable credit (noting the 90% limit).21 Failure to properly link these schedules can lead to a suspension of the refund or an automatic denial by the DOR’s automated processing systems.20

Comprehensive Case Study: The Narrative of BioInnovation Corp

To ground these abstract principles in reality, let us examine the case of BioInnovation Corp, a fictional but representative certified life sciences company during the 2024 tax year.

The Initial Position

BioInnovation Corp has been highly successful in its R&D efforts but is still three years away from its first product launch, meaning it has zero revenue and a modest corporate excise liability derived primarily from its non-income measure (tangible property).3

• 2024 Corporate Excise Liability: $1,000,000 (Property measure).
• Generated R&D Credits: $1,275,000 (Calculated on Schedule RC).
• MLSC Gross Award Amount: $300,000 (Per Tax Incentive Agreement).

Step 1: The Standard Liability Offset

Before BioInnovation Corp can touch its “90% refund,” it must apply its credits against its $1,000,000 liability according to the mandatory rules.2

• The first $25,000 of excise is offset at 100% = $25,000 used.
• The remaining $975,000 of excise ($1,000,000 – $25,000) is offset at 75% = $731,250 used.
• Total Standard Credit Used: $756,250.
• Remaining Excise Due: $243,750.
• Credit Balance Remaining: $518,750 ($1,275,000 total – $756,250 used).

Step 2: The Refundable Election Calculation

The “balance” is $518,750. BioInnovation Corp now compares this balance to its MLSC award of $300,000. Under the “lesser of” rule from TIR 13-6, the company can only monetize $300,000 of its credits.2

• Refundable Portion (90% of the $300,000 award) = $270,000.
• Forfeited Portion (10% of the $300,000 award) = $30,000.

Step 3: Offsetting the Residual Liability

The $270,000 refundable amount is applied first against the $243,750 excise that remained due because of the 75% rule.2 This is a critical advantage: the “refundable” credit allows the company to reach a $0 tax liability, which a standard corporation could not achieve.5

• Net Excise Due: $0 ($243,750 liability – $270,000 refundable credit).
• Cash Refund to be Issued: $26,250 ($270,000 – $243,750).

Step 4: Final Carryforward Accounting

The company must now determine what remains in its tax “bank” for 2025. It must subtract the full value (100%) of the credits utilized for the refund from its total pool.4

• Total Initial Credits: $1,275,000.
• Credits Used (Standard): $756,250.
• Credits Used (Life Sciences Award): $300,000.
• Final Carryforward to 2025: $218,750.

Through this process, BioInnovation Corp has successfully generated $26,250 in cash and avoided paying $243,750 in tax, effectively providing $270,000 in immediate liquidity for its operations.2

Unitary Reporting and Aggregated Groups

For larger life sciences companies operating as part of a combined group, the calculation of the “90% of balance” becomes even more complex. Massachusetts requires unitary business groups to file Form 355U.22

Single Threshold Rule

Aggregated groups share a single $25,000 threshold for the 100% offset.3 This means that the “balance” for a specific subsidiary might be smaller than if it filed on a stand-alone basis, as the group’s total credit use is consolidated.7 However, credits can generally be shared between members of the same combined group to offset liability, provided they are part of the same unitary business.22

Intra-Group Sharing of Refundable Credits

Schedule U-IC instructions clarify that if a member is taking the research credit based on its own activities, it reports that on Schedule CMS.22 If that member is a certified life sciences company, it can seek a refund of its own unused credits, even if other members of the group have tax liability that could have been offset.18 This allows a pre-revenue R&D subsidiary of a larger profitable conglomerate to still participate in the refund program to fund its specific research initiatives.

Economic Implications of the “90% Haircut”

The 10% forfeiture required for the refund is a strategic cost-benefit calculation. For a company with a high internal rate of return or an urgent need for non-dilutive capital, 90 cents today is often worth significantly more than a full dollar 10 years from now.

Present Value Considerations

Consider a company that expects to remain in a loss position for the next 7 years. A $100,000 credit that can be carried forward for 15 years has a present value that is significantly lower than $90,000 in cash today when discounted at a typical venture-backed startup’s cost of capital (often 20% or higher). By opting for the refund, the company effectively trades a long-term, uncertain tax asset for an immediate, certain cash infusion that can be used to hire researchers or purchase lab equipment.14

The Policy Rationale

From the perspective of the Commonwealth, the 10% limit serves two purposes. First, it manages the state’s cash outflows by ensuring that the treasury is not paying out the full theoretical value of the credits.4 Second, it creates a “self-selection” mechanism where only companies with a genuine need for immediate cash will choose the refund, while more established, profitable firms will continue to carry their credits forward to offset future taxes at the full 100% rate.3

Compliance Risks and Audit Strategy

Given that the “90% of balance” refund represents a direct payment from the state treasury, the DOR maintains a robust audit posture toward these claims.

The Four-Part Test and Nexus

Auditors will first verify that the research meets the federal four-part test: it must be technological in nature, for a permitted purpose, intended to eliminate uncertainty, and involve a process of experimentation.6 More critically for the “balance” calculation, the DOR will verify that the expenses have a strict Massachusetts nexus.3 Any expenses related to clinical trials performed outside of Massachusetts must be excluded from the § 38M credit calculation—though they may be eligible for the separate non-refundable § 38W Life Sciences Research Credit.1

Audit of the Base Amount

A common area of dispute is the calculation of the “base amount,” particularly for the traditional method. Because the base amount relies on gross receipts from the four preceding years, a single error in a prior year’s return can ripple forward and artificially inflate the current year’s “balance”.8 The DOR has the authority to examine records from those prior years to verify the current year’s credit, even if those years are technically closed for assessment under the standard 3-year statute of limitations.3

Retention Recommendations

Tax practitioners recommend that any company claiming a refundable research credit maintain:

• Contemporaneous time-tracking records for all employees included in the wage QREs.3
• Detailed contracts and invoices for all contract research.3
• General ledger accounts that specifically track R&D supplies separate from general office supplies.9
• Evidence of the physical location where the research was performed.9

Future Outlook: The 2024 Economic Leadership Act

The environment for the “90% of balance” refund is currently in a state of expansion. In November 2024, Governor Maura Healey signed the “Act relative to strengthening Massachusetts’ economic leadership,” which extended the life sciences initiative for another 10 years and committed nearly $1 billion in total funding.24

Increased Incentives

The bill not only increased the annual tax incentive cap to $40 million but also reaffirmed the Commonwealth’s commitment to the refundability of the § 38M credit.13 For businesses, this suggests a stable regulatory environment where the “90% of balance” will remain a viable monetization strategy through at least the mid-2030s.24

Evolving Compliance Standards

As the program grows, the MLSC and DOR have introduced more sophisticated monitoring tools. Companies are now required to provide detailed annual reports monitoring their hiring and retention against the commitments that formed the basis of their award.14 This “post-award” compliance is just as important as the initial calculation of the “balance,” as any shortfall in headcount can lead to the decertification and recapture mentioned earlier.5

Conclusion

The 90% of Balance (Refundable Portion Limit) is a sophisticated fiscal tool that bridges the gap between scientific innovation and financial sustainability in the Massachusetts life sciences sector. By allowing companies to bypass the restrictive 75% liability cap and monetize their excess research credits, the Commonwealth provides a critical form of non-dilutive capital that fuels the state’s leadership in the global biotech economy.1

Understanding this provision requires a three-dimensional view of tax law: the base R&D credit mechanics of § 38M, the mandatory excise limitations of § 38M(d), and the discretionary authorization process of the MLSC.3 While the 10% “haircut” represents a real cost to the taxpayer, the immediate liquidity provided by the refund is often the deciding factor in a startup’s ability to maintain its research momentum. As the life sciences ecosystem in Massachusetts continues to expand under the new 2024 legislative mandates, the mastery of the refundable balance rules will remain an essential competency for any tax professional or corporate leader in the field.13

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