Massachusetts R&D Tax Credit

Massachusetts offers an R&D tax credit program to help eligible businesses offset research costs related to new or improved products, processes, or software programs. The program is designed to attract new research-based companies and job creators, as well as support existing businesses to continue their operations in the state.

There are two types of Massachusetts R&D tax credit: research credit and experimentation credit. In general, you must meet certain performance standards to use these credits as a business expense when you file your taxes.

Massachusetts Research and Development Tax Credit Explained

In accordance with 830 CMR 63.38M, the Commonwealth of Massachusetts grants refundable tax credits to businesses that match IRC § 41 criteria. For tax years starting on or after January 1, 2015, the Economic Development Act, St. 2014, c. 287 amended the research credit provisions in G.L. c. 63, 38M. One of the changes allows businesses to choose to have the research credit determined using an alternative simplified method. As a result, you can calculate the tax credit in a manner comparable to the federal credit for QREs under IRC § 41.

However, Massachusetts puts a limit on credit use. That means the Massachusetts R&D tax credit cannot reduce your liability below $456.

Companies in Massachusetts can choose to calculate the credit using either their federal or Massachusetts gross receipts. The election remains for the following three years. In addition, the credit is only available for 100% of the first $25,000 in corporate excise due, plus 75% of any excise due over $25,000. But you can carry forward credits you didn’t use, even in the case of a merger.

Qualifying Expenses

Massachusetts QREs cover the following costs that are specifically connected to research and development operations carried out in the state.

• 65% of the sums you paid to third parties as contract research expenditures for research activities carried out at a Massachusetts-based research site;

• Sums you paid to use Massachusetts-based computers for qualified research conducted there. But these sums must be regarded as internal research expenses;

• Sums you spent for items consumed or used in Massachusetts to perform quality research; or

• Remuneration for competent services rendered in Massachusetts.

How to Calculate the Massachusetts Research Tax Credit

Regular Method

The regular credit equals 10% of excess QREs for the tax year over the state’s qualified research base amount plus 15% of the Massachusetts basic research payments for the tax year. If you didn’t have any QREs in the three tax years before the tax year for which the credit is being assessed, the Massachusetts research tax credit equals 5% of your QRE for the tax year.

Alternative Simplified Method

• For the calendar years 2015, 2016, and 2017: the amount of ASC equals 5% of the QREs exceeding 50% of the average QREs for the three taxable years before the credit year.

• For the calendar years 2018, 2019, and 2020: the ASC is 7.5% of the QREs exceeding 50% of the average QREs for the three prior taxable years.

• For calendar years 2021 and after: the amount of ASC is 10% of the QREs exceeding 50% of the average QREs for the three prior taxable years.

Massachusetts Research and Development Tax Credit: Takeaway

You can choose between the Regular Method and the ASC to determine your benefit from the Massachusetts R&D tax credit for taxable years. Moreover, in accordance with the non-income or the income measure of the corporate excise, S-corporations can use the credit against their corporate excise due. However, an S-corporation’s individual stockholders do not receive the credit.

FAQs

What kind of companies can apply for an R&D tax credit in Massachusetts?

Unincorporated Flow-Through Entities, S-Corporations, C-Corporations

What is the deadline for applying for an R&D tax credit in Massachusetts?

You must submit your application with the Massachusetts Tax Return on Form Schedule R.C.

What data do I need to calculate credit an R&D tax credit in Massachusetts?

Claim period QREs (Qualified R&D Expenses)

What information do I need to provide to file an R&D tax credit in Massachusetts?

Gross Receipts as well as QREs for the past four years.

Is credit carryforward an option in Massachusetts?

Yes, up to fifteen years. However, there are no time caps for credits subject to the 75% excise tax limitation.