Overview of Multi-State Research Tax Incentives
Multi-State Research Tax Incentives (e.g., whether in the form of a credit, deduction or grant) are a highly advantageous way to supplement the federal-level research and development tax credit pursuant to I.R.C. § 41 in tax effecting companies true cost of their research and development spend while lowering a companies blended multi-state effective tax rate for both tax accrual and tax return purposes at the multi-state levels.
More specifically, in addition to the Federal-Level Research and Development Tax Credit pursuant to I.R.C. § 41, there are now approximately forty states that offer research tax incentives and these states generally follow the federal statutory, administrative and judicial interpretations on what constitutes Qualified Research Activities (hereinafter “QRAs”) and Qualified Research Expenditures (hereinafter “QREs”) with the notable exception of states such as Connecticut which lowers the threshold to utilize the I.R.C. § 174 research and experimental expenditures definition for QREs.
It should be duly noted that state level research tax incentives can be much more lucrative than the federal tax credit because states often provide generous research tax incentives to encourage taxpayers to perform research and other business activities within their respective states. As a caveat, there are clearly distinctions in other state research and development incentive programs as well, such as California which generally follows the federal rules, but utilizes a different gross receipts calculation to include only sales of real, tangible, or intangible property held for sale to customers in the ordinary course of the taxpayer’s trade or business delivered or shipped to a purchaser within California, but does not include service-related receipts, rents or interest. Furthermore, in addition to offering a research incentive, some states may allow an entity in a loss position (e.g., without a current tax liability in which to utilize the credit against) to immediately monetize their credit (e.g., “cash-in” the credit at a discounted selling price) with the state (e.g., Connecticut) or transfer it to a third party that may be able to utilize it (e.g., New Jersey), rather than carry it forward to a future year when a company has a tax liability to utilize it against.
A Synopsis of the Newly Enacted Texas Research Tax Credit
The Texas legislature worked diligently and collaboratively this month to pass House Bill 800, which ultimately will bring back to Texas their version of a research tax credit and will ultimately drive business back to Texas helping to create thousands of research and development based jobs for the State. The Texas research tax credit had previously expired and lapsed for several years without being retroactively renewed due in part to the recession.
The new and improved State credit is available for companies that design, develop, and / or manufacture in the state of Texas and applies to both a company’s new product development efforts as well as their manufacturing process improvements. It should be duly noted that this state credit, similar to the federal credit, can be broadly applied to virtually all industries including, but certainly not limited to, Life Science Companies (e.g., Pharmaceuticals, Bio-Technology, Medical Devices); Food Sciences Companies (e.g., including Bio-Flavoring); Energy, Chemicals, Natural Gas, and Oil Companies; Aerospace & Defense Companies; Electronics and Software Companies; amongst countless others industries.
Companies need to claim this Texas credit not only because it reduces the state level effective tax rate, but also because it truly compliments the federal credit in further reducing the cost of a company’s research and development spend and appropriately tax effects a company’s research and development spend for both tax accrual and tax return purposes.
Contact Peter J. Scalise today for a complimentary consultation to see if your business may qualify for federal and multi-state research tax incentives.
About the Author
Peter J. Scalise serves as the National Partner-in-Charge and the Federal Tax Practice Leader for Engineered Tax Services. Peter is a highly distinguished BIG 4 Alumni Tax Practice Leader and has approximately twenty years of progressive public accounting experience developing, managing, and leading multi-million dollar tax advisory practices on both a regional and national level.
Peter is a renowned keynote speaker and author on specialty tax incentives and legislative updates from Capitol Hill for NAREIT, USGBC, AICPA, ASTP, NATP, ABA, AIA, TEI and serves as a volunteer member of the iShade Tax Faculty. Peter serves on both the Board of Directors and Board of Editors for The American Society of Tax Professionals (“ASTP”) and is the Founding President and Chairman of The Northeastern Region Tax Roundtable, an operating division of ASTP.