Overview
Virginia has established long-standing research and development (R&D) tax credits to stimulate innovation within the state. These credits are available to businesses and individuals engaged in qualified research activities, encouraging investment in Virginia's R&D sector.
Recent legislative changes have modified both the calculation and funding of these credits. These adjustments will impact all R&D activities in Virginia, with some entities benefiting while others may face disadvantages. The new funding changes also open up additional tax planning opportunities, making it essential for taxpayers to understand the implications.
Changes to Virginia's R&D Credit Programs
Virginia offers two types of R&D tax credits: the Research and Development Expenses Tax Credit (RDC), which is refundable, and the Major Research and Development Expenses Tax Credit (MRD), which is non-refundable. Taxpayers must submit an annual application to the state, which allocates a fixed pool of funds to all qualified applicants.
Effective 07/01/2024 (L. 2024, H1518, c. 661)
Impacts
Two main aspects of the credit changes will affect taxpayers: shifts in funding pools and a new cap on the MRD credit.
Beneficiaries
Taxpayers claiming the RDC credit will benefit from an increased credit pool, which has more than doubled. As a result, these taxpayers are likely to receive significantly higher credits than in previous years, potentially reaching or exceeding the $45,000 cap.
Adversely Affected
Taxpayers who have historically claimed MRD credits in excess of $300,000 will face immediate reductions in their credit applications due to the new cap. Additionally, a 33% reduction in the overall credit pool will further limit their benefits.
Uncertain Impact
For taxpayers who typically claim MRD credits near or below $300,000, the impact is less clear. The new cap will not directly affect them, but it will reduce the credits available to other taxpayers with larger claims. Consequently, those with smaller MRD credits may receive a larger share of the reduced credit pool, making the net impact uncertain.
Tax Planning Opportunity
A key feature of Virginia’s R&D tax credit system is the absence of a Qualified Research Expenses (QRE) requirement for the RDC credit, despite the $5 million QRE requirement for the MRD credit. Although taxpayers cannot claim both credits simultaneously, those qualifying for the MRD credit can choose to apply under either regime.
Taxpayers with over $5 million in Virginia QREs should have their tax preparers model projected award rates for each credit and consider whether applying for the RDC credit might be more advantageous than the MRD credit. Applications are due to the state by September 1.
Interested in how Kipsi can automate state R&D credit calculations for your clients? Schedule a time to chat with us here!
