Virginia Introduces New & Improved R&D Tax Credits

Launched in 2011, Virginia’s previous research and development (R&D) program allowed an income tax credit to businesses for qualified R&D expenses for taxable years beginning on or after January 1, 2011, but before January 1, 2019. However, just recently, Virginia’s Legislature has passed Bills (House Bill 884 and Senate Bill 58) which has greatly modified the state’s existing R&D credits. Most notably, the Bill extends the expiration date of the program, increases the amount of the existing R&D credits, and creates an additional credit for major research and development expenses.

In specific, The Bills change the existing credit to:

• Increase the existing credit cap from $6 million to $7 million, the maximum amount of tax credits cap that the Department of Taxation may grant each fiscal year;
• Extend the expiration date from January 1, 2019 to January 1, 2022;
• Increase the amount of credits a taxpayer may claim to:
  • 15% of the first $300,000 ($45,000) of a taxpayer’s Virginia qualified research and development that exceed a base amount; or
  • 20% of the first $300,000 ($60,000) of those expenses if the research and development were conducted with a Virginia college or university;
• Deliver an alternative, simplified method to compute tax credits; and
• Prohibit businesses from using the existing credit for R&D expenses over $5 million.

Moreover, for companies who do have R&D expenses of $5 million, the Bill has created a new, non-refundable credit called the Major R&D Expense Credit. This is effective for tax years beginning on or after January 1, 2016 but before January 1, 2022 and is available for taxpayers with qualified R&D expenses of more than $5 million per year. Qualifying taxpayers can use the Major R&D Expense Credit against corporate and personal income and the annual credit cap for the credit is $20 million.  In summary, the Major R&D Expense Credit is a credit of 10% of the difference between a taxpayer’s taxable year Virginia R&D expenses less 50% of the average Virginia R&D expenses incurred by the taxpayer in the prior three years. For taxpayers that did not incur Virginia R&D expenses in any of the three prior years, the Major R&D Expense Credit is 5% of the taxable year’s Virginia R&D expenses.

Unlike the regular R&D credit discussed above, which is a refundable credit, the Major R&D Expense Credit is limited to 75% of the taxpayer’s Virginia income tax liability for the year. However, any unused portion of the credit may be carried forward for 10 years. It’s important to note that a taxpayer claiming the major R&D expense credit cannot claim the normal R&D credit.

Overall,  R&D tax credits offer an opportunity for firms to leverage the role of innovation and is a vital competitive factor for companies as it lowers the effective tax rate and can refuel R&D efforts through increased cash flow. Hence, the expansion of these credits in Virginia marks an improvement on the state’s program and a commitment in increasing R&D activity. The R&D tax credit, at both state and federal levels, is an economic policy that is aimed at increasing the innovative potential of the economy – if you have any questions about either state or federal credits, please contact one of Swanson Reed’s Specialist R&D Tax Advisors.