Virginia R&D Tax Credit Summary

 

Virginia allows a refundable individual and corporate income tax credit for conducting qualified research and development in Virginia, to the extent a taxpayer's Virginia qualified R&D expenses (QREs) exceed a base amount. Virginia's R&D tax credit follows IRC Section 41 rules for qualified activities and expenses, and follows a modified version of the federal credit method.

R&D Tax Credit (Refundable)

Virginia allows a refundable income tax credit for individuals and businesses for qualified research and development expenses for taxable years beginning on or after Jan. 1, 2011, but before Jan. 1, 2022.

Effective for taxable years beginning on or after Jan. 1, 2016, the tax credit amounts are:

  • 15% of the first $300,000 in Virginia qualified research and development expenses, or

  • 20% of the first $300,000 of Virginia qualified research and development expenses if the research was conducted in conjunction with a Virginia public or private college or university, to the extent the expenses exceed a base amount.

There is a $7 million cap on the total amount of credits allowed in any fiscal year.

Virginia Tax will require taxpayers applying for the credit to provide information including:

  1. The number of full-time employees employed by the taxpayer in the Commonwealth during the taxable year for which the credit is sought;

  2. The taxpayer's sector or sectors according to the 2012 edition of the North American Industry Classification System (NAICS) as published by the United States Census Bureau;

  3. A brief description of the area, discipline, or field of Virginia qualified research performed by the taxpayer;

  4. The total gross receipts or anticipated total gross receipts of the taxpayer for the taxable year for which the credit is sought;

  5. Whether the Virginia qualified research was conducted in conjunction with a Virginia public or private college or university.

If the total qualified expenses are in excess of $5,000,000 you must apply for the Major Research and Development Tax Credit (see below)

Major Research and Development Tax Credit
  • For taxable years beginning on or after Jan. 1, 2016, but before Jan. 1, 2022, a taxpayer with Virginia qualified research and development expenses for the taxable year in excess of $5 million will be allowed a nonrefundable tax credit against the tax levied as stated in Va. Code § 58.1-320 or 58.1-400 in an amount equal to 10% of the difference between the Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year and 50% of the average Virginia qualified research and development expenses paid or incurred by the taxpayer for the 3 taxable years immediately preceding the taxable year for which the credit is being determined.

    • If the taxpayer didn't pay or incur Virginia qualified research and development expenses in any 1 of the 3 taxable years immediately preceding the taxable year for which the credit is being determined, the tax credit will equal 5% of the Virginia qualified research and development expenses paid or incurred by the taxpayer during the relevant taxable year.

  • No more than $20 million in tax credits can be issued in any fiscal year. 

    • If the approved applications for the tax credits allowed under this section exceed $20 million for any taxable year, Virginia Tax will apportion the credits by dividing $20 million by the total amount of tax credits approved, to determine the percentage of allowed tax credits each taxpayer will receive.

  • The amount of the credit claimed for the taxable year will not exceed 75% of the total amount of tax imposed by this chapter upon the taxpayer for the taxable year.

  • Any taxpayer who claims the tax credit for Virginia qualified research and development expenses in keeping with this section can't use the expenses as the basis for claiming any other credit provided under the Code of Virginia.

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

  • (1) R&D Tax Credit (Refundable)

    • This credit may be allocated among owners in proportion to each owner's percentage of ownership or interest in the pass-through entity, or as the owners mutually agree, or as provided in the partnership agreement or other entity document using Form PTE within 30 days after the credit is granted but at least 90 days before filing an income tax return.

    • Effective for tax year 2014, pass-through entities may elect to claim the entire granted amount at the entity level.

  • (2) Major Research and Development Tax Credit

    • Credits granted to a partnership, limited liability company, or electing small business corporation (S corporation) will be allocated to the individual partners, members, or shareholders, respectively, in proportion to their ownership interests in these entities or in accordance with a written agreement entered into by the individual partners, members, or shareholders using Form PTE within 30 days after the credit is granted UNLESS the partnership, limited liability company, or electing small business corporation (S corporation) elects for the credits not to be allocated but to be received and claimed at the entity level by the partnership, limited liability company, or electing small business corporation (S corporation).

Deadline for Tax Filing: Application due by 7/1

(1) R&D Tax Credit (Refundable)

  • Credit applications are due July 1. Submitting a late application will disqualify you for the credit.

  • This credit requires certification from the Tax Credit Unit to be claimed on your tax return.

    • After reviewing the application, a letter will be sent certifying the credit.​​

  • Any taxpayer who claims the tax credit for Virginia qualified research and development expenses pursuant to this section shall not use such expenses as the basis for claiming any other credit provided under the Code of Virginia.

  • Additionally, the taxpayer will NOT be eligible if research is conducted in the Commonwealth on human cells or tissue derived from induced abortions or from stem cells obtained from human embryos.

    • The foregoing provision shall NOT apply to research conducted using stem cells other than embryonic stem cells.

  • If the total qualified expenses are in excess of $5,000,000 you must apply for the Major Research and Development Tax Credit

(2) Major Research and Development Tax Credit

  • Applications must be received for the tax credit no later than July 1 of the calendar year following the close of the taxable year in which the expenses were paid or incurred.

  • Businesses must apply by July 1 using​ Form MRD. To compute the Virginia Base Amount for Form MRD, using a specified spreadsheet.

  • Submitting a late application will disqualify you from the credit.

    • This credit requires certification from the Tax Credit Unit to be claimed on your tax return. A letter will be sent to certify the credit. 

  • No tax credit will be allowed for any expenses that are paid for or incurred by a taxpayer for research conducted in Virginia on human cells or tissue derived from induced abortions or from stem cells obtained from human embryos.

    • This provision does NOT apply to research conducted using stem cells other than embryonic stem cells.

  • Reference: Va. Code § 58.1-439.12:11.   

Data Required to Compute Credit

  • Claim Period VA Qualified R&D Expenses (QREs)

  • VA QREs for Prior 3 Years

  • Gross Receipts for Prior 4 Years

Credit Carryforward:

  • Any credit not usable for the taxable year for which the credit was first allowed may be carried over for credit against the income taxes of the taxpayer in the next 10 succeeding taxable years or until the total amount of the tax credit has been taken, whichever is sooner.

Refundable/Transferable Tax Credit: Yes (See Major R&D Tax Credit)

Important Links and Forms:

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