Pennsylvania R&D Tax Credit Summary

 

The Pennsylvania research credit is very similar to the federal version including the definition of qualifying research. A corporation that incurs qualified research and development expenses in Pennsylvania may apply for a research and development tax credit. Unique to Pennsylvania, with the R&D Tax Credit Assignment Program, technology companies can sell any unused R&D tax credits in the open market to help advance and grow their businesses.

Under Act 85 of 2016, the sunset date for the Pennsylvania research credit has been repealed, and the total tax credit cap is $55,000,000. Of the total tax credit cap, $11,000,000 is set aside for small business research credits. The Pennsylvania research credit can be used to offset Corporate Net Income Tax, Pennsylvania Personal Income Tax, and Capital Stock and Franchise Tax (through 2015). Pennsylvania research credits are transferable with approval from the Department of community and Economic Development. Any unused Pennsylvania research credits may be carried forward for a period up to 15 years but may not be carried back.

PA R&D Credit Summary

The Pennsylvania R&D tax credit (modified "Alternative Simplified Credit") equals:

  • 10% (large businesses) and 20% (small businesses) of Pennsylvania qualified research expenses less the greater of 50% of expenses or average of prior 4 years of qualified research expenses (base amount).

  • A "Qualified Small Business" (for-profit corporation, limited liability company, partnership or proprietorship) has net book value of assets totaling, less than $5 million at the beginning or end of the taxable year for which Pennsylvania qualified research and development expense is incurred, as reported on the balance sheet, less than five million dollars).

Eligible Entities: C-Corporations, S-Corporations, LLCs, Partnerships

Deadline for Tax Filing: Application due by 9/15 for research expenses incurred in taxable year that ended in the prior calendar year.

  • Federal Form 6765 has to be completed and sent to the department by September 15 in order for an applicant to be eligible for the PA Research and Development Tax Credit.

  • Must file breakdown of R&D Expenditures forms (REV545A) and Federal Form 6765 for years that had changes in expenditures or years for which this information was not already provided in prior filings of the REV-545.

  • Third-party subcontractor information is a requirement​

  • All applications must be submitted on the new online application platform

Taxpayers must meet four criteria in order to submit an application for the R&D Tax Credit:

  1. Must be an entity subject to Personal Income Tax (Article III) or Corporate Net Income Tax (Article IV).

  2. Must have research expenses incurred for qualified research and development conducted within Pennsylvania, as defined in section 41(d) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. section 41(d)) and section 41(b) of the Internal Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. section 41(b)) incurred for Pennsylvania qualified research and development.

  3. Must be in state tax compliance with the laws and regulations of the Commonwealth as determined by the Department of Revenue.

  4. Must have at least two years of R&D expenditures (previously only one year of prior R&D expenditures were required).

Data Required to Compute Credit:

  • Claim Period Qualified R&D Expenses (QREs)

  • QREs for Prior 4 Years

Credit Carryforward: 15 Years

  • No portion of the credit may be carried back, however, once a credit is approved and applied against the tax liability for the year in which the credit was approved, any unused credit can be carried forward for up to 15 years.

Special Notes:

  • Large Businesses: Total Assets > $5M

  • Small Businesses: Total Assets < $5M

  • The PA R&D credit cannot be carried back

Refundable/Transferable Tax Credit: Yes, credits may be eligible to be sold to other taxpayers​

  • Sale or assignment of credit

    • Taxpayers entitled to a research and development credit may sell or assign all or any portion of the credits awarded, with the approval of the Department of Community and Economic Development

    • The sale or assignment of the credit will not be approved if the seller has any outstanding state taxes

    • All reports must have been filed and all outstanding tax liabilities paid before the sale or assignment is approved

    • The purchaser or assignee must claim the credit in the tax year in which it is purchased or assigned.

      • However, the amount of credit the purchaser or assignee may use against any one qualified tax liability cannot exceed 75% of the qualified tax liability for that tax year.

      • The purchaser or assignee may NOT carry over, carry back or carry forward any amount of the purchased or assigned credit, NOR may they obtain a refund or assign the purchased or assigned credit.

Flow-Through Entities: Effective for awards made Dec. 15, 2006, and after, pass-through entities included limited liability companies and partnerships, thus the credit can be transferred (passed-though) in writing to shareholders, members or partners in their proportionate share.  

  • The shareholder, member or partner must use the credit in the taxable year in which the transfer is made.  R&D credits cannot be used against employer withholding of employees’ personal income tax.  

  • Also effective for awards made Dec. 15, 2006, and after, the tentative credit on Line 7 is equal to 10 percent (10%) for large companies and 20 percent (20%) for small companies.

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