How Pennsylvania Has Enhanced Its Research and Development Tax Credit Program

May 2018

Summary

As part of its “Government that Works” program, the Pennsylvania Department of Revenue (DOR) recently introduced a new online-based application process for taxpayers who apply for the state’s Research and Development (R&D) tax credit. Per DOR’s Electronic Filing Notice, all Pennsylvania R&D tax credit applications must be submitted through the new online platform, which will be accessible June 21, 2018, through the filing deadline of September 15, 2018. Both taxpayers and tax practitioners will be able to access the system, and the application process will require users to create a DOR-specific electronic signature and log-in name.
 

Details

Background
The Pennsylvania R&D Tax Credit Program
Act 7 of 1997 created the Pennsylvania R&D tax credit program, which later became Article XVII-B of the Tax Reform Code of 1971. Its goal is to incentivize taxpayers to try to develop or improve their products, processes, software, techniques, inventions, or formulas, for example, by making them better, faster, cheaper, or greener.
 
Pennsylvania Act 85 of 2016 most recently authorized the DOR to approve up to $55 million in total R&D tax credits per fiscal year for all applicants, with $11 million of the total set aside for “small businesses,” i.e., for-profit corporations, limited liability companies, partnerships, or sole proprietorships with a net book value of assets totaling less than $5 million.
 
Per the publicly available Report to the Pennsylvania General Assembly on the Research and Development Tax Credit (March 15, 2018), the entire $55 million in R&D tax credits made available this past year was awarded to 1,126 applicants in December 2017. Without the $55 million cap, over $108 million in credits would have been awarded. There were 531 small business applicants, and without the $11 million cap, there would have been over $22 million in credits awarded to those applicants.

The awarded credit may be claimed against Pennsylvania capital stock and franchise tax, the corporate net income tax, and the personal income tax. Taxpayers who are awarded R&D tax credits may carry over and apply unused tax credits for up to fifteen succeeding taxable years. Additionally, one of the more noteworthy features of the R&D tax credit program is the ability for taxpayers to sell or assign unused tax credits to other taxpayers. To qualify, expenses must be for activities performed in Pennsylvania.
 

BDO Insights

The new electronic filing system will enable taxpayers to take advantage of one of the United States’ more generous state R&D tax credit programs more efficiently and effectively than before. Not only has the paper filing requirement been eliminated, but taxpayers will now have the ability to monitor their application status in real-time using tools within the new online system.
 

To learn more about Pennsylvania’s R&D tax credit program and how it may benefit your business, please contact:
 
Jim Feeser
Managing Director, R&D Tax Services
  David Kalman
Senior Manager, R&D Tax Services