Businesses that meet the requirement for the federal Research & Development (R&D) tax credit and perform R&D activities within the State of Pennsylvania may also be eligible for a State’s R&D tax credit. The deadline to apply for the Pennsylvania (R&D) tax credit is December 1, 2022. Applications must be submitted on the PA Research and Development (R&D) Tax Credit online application system.
The PA R&D credit reduces state taxable income by 10% of the difference between the current-year R&D expense and the greatest of 50% of the current year expense or the average R&D expenditure from the previous four years. For small businesses (less than $5 million in assets), this rate increases to 20%. The following example illustrates the tax savings potential of this credit.
Assume an entity spent $500,000 on R&D in 2021, and spent $400,000, $300,000, $650,000, and $250,000 in years 2020, 2019, 2018, and 2107, respectively. To determine the amount of the credit, the Company must first determine which is greater – 50% of the current-year expenditure ($250,000), or the average of the prior-years’ expenditures ($400,000). Since the prior-years’ average is greater, $400,000 would be used in the next step of the calculation. The difference between the current-year R&D expense ($500,000) and the average of the prior-years’ R&D expenditures ($400,000) is $100,000. Thus, the credit amount (10% of this difference of $100,000) would be $10,000.
Per the Pennsylvania guidelines, qualified businesses, including pass-through entities, can apply the tax credit against the following State taxes: Capital Stock/Foreign Franchise Tax, Corporate Net Income Tax, and Personal Income Tax. The tax credit must first be applied to the entity’s corporate tax liability (if any) for the year in which the tax credit is awarded before it can be passed through to its partners, shareholders, or members. The tax credit can also be sold or assigned.
Responses to FAQs related to the R&D credit are available on the PA DoR website. For additional assistance with this application or any other tax matter, please reach out to Grossman Yanak & Ford LLP at (412) 338-9300.
Noah Trimble assisted with the research and preparation of this post. As a GYF Tax Intern, Noah has helped to prepare individual and corporate tax returns. Noah will continue to work with the GYF Tax Services Group as he completes his BS/MBA from Robert Morris University.