Virginia R&D Tax Credit Changes: What You Need To Know

Virginia has long-standing research and development (R&D) tax credits in place aimed at incentivizing innovation within the state. The credits are provided to businesses and individuals engaged...

United States Tax

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Overview

Virginia has long-standing research and development (R&D) tax credits in place aimed at incentivizing innovation within the state. The credits are provided to businesses and individuals engaged in qualified research activities in the state, encouraging investments in Virigina research and development.

A recent statutory change alters both how some of the credits are calculated and how they are funded. These changes will affect everyone conducting R&D in Virginia, some positively and others negatively. The new funding change also expands the tax planning opportunities around the credit, so it is important for taxpayers to understand how they will be impacted.

Changes to Both Virginia R&D Credit Regimes

Virginia offers two different credits for taxpayers conducting R&D in the state: the Research and Development Expenses Tax Credit (RDC), which is refundable, and the Major Research and Development Expenses Tax Credit (MRD), which is not. Taxpayers must submit an application each year to the state, which compiles all the applications and allocates set pools of money to all qualified applicants.

Impacts

Two different aspects of the credit changes will impact taxpayers: the shifts in funding pools and the new cap to the MRD credit.

Who does it help?	For taxpayers claiming the RDC credit, the underlying mechanics of the calculation have not changed, and the credit pool has more than doubled. As a result, taxpayers in this category will likely see a significantly higher credit than in prior years, up to (or even over) the $45,000 cap.
Who does it hurt?	For taxpayers historically claiming the MRD credit in significant excess of $300,000, the new application cap will immediately cut the size of their applications. And then the 33 percent reduction in the overall credit pool will further limit their benefit.
For whom is the impact unclear?	For taxpayers historically claiming a MRD credit near or below $300,000, the impact is less clear. The new application cap of $300,000 will not directly impact them. But it will act to reduce the credits of other Virginia taxpayers, some of whom would otherwise have very large credits. As a result, MRD taxpayers with smaller credits will end up with a larger share of the credit pool than they otherwise would. But the credit pool is significantly smaller than last year. It is not clear what the net impact will be.

Tax Planning Opportunity

One noteworthy feature of Virginia's R&D tax credit regime is that although the MRD credit has a $5 million QRE requirement, there is no corresponding QRE requirement for the RDC credit. Thus, although the law prevents taxpayers from claiming both credits, a taxpayer that qualifies for the MRD credit could elect to apply under either regime.

If you have more than $5 million of Virginia QREs, your tax preparer can model projected award rates for each credit and can advise you whether it might be worthwhile to pursue the RDC credit instead of the MRD credit. And remember that applications are due to the state on September 1.

Footnotes

1 There are two ways taxpayers can elect to calculate the RDC credit. Both methods have the same credit cap.

2 Note that work done in conjunction with a Virginia institution of higher education can receive a higher rate and application amount.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.