Virginia R&D Tax Credit

Research and development activities are a significant driver of product and process innovation. These activities can be an expensive investment, but they are also one of the most effective ways to inspire future growth. For this reason, many states, like Virginia, have created tax credits to encourage businesses to invest in R&D operations.

You may be able to claim Virginia R&D Tax Credit as a business operating within the state. However, to obtain it, you must meet certain eligibility criteria and file the correct forms with the state by their due dates.

Virginia Research and Development Tax Credit Explained

You can claim the regular Virginia research tax credit against corporate income tax if you have $5 million or fewer QREs in the tax year. The amount is equivalent to 15% of the first $300,000 you incurred in the tax year. That said, if your QREs were paid to a Virginia university or college, you are eligible for an increased credit rate of 20%.

However, this state incentive has an annual limit of $45,000 ($60,000 for QREs paid to the state’s private or public universities), but any excess is refundable. In addition, the total credit amount is limited to $7.7 million for tax years 2021‒2024.

To apply, you must submit Virginia Form RDC before September 1. Individuals claim the credit using Schedule CR, while corporations need Form 500CR. If approved, your certification letter should arrive by November 30. On the other hand, pass-through businesses must submit Form PTE within 30 days after receiving the award letter to distribute credits to shareholders.

Important to note:

• You can’t use the same costs to claim other Virginia tax credits.

• Virginia R&D credit will expire on December 31, 2024.

Major Research and Development Expenses Tax Credit

You can claim the MRD credit if your business tops $5 million in QREs in a tax year. The credit amount is 10% of the excess QREs over the base amount. Moreover, it is a non-refundable incentive that has no cap for taxpayers, but the total credit amount is limited to $24 million.

You can only use this incentive to offset a maximum of 75% of your tax due in a taxable year. Still, you can carry forward any unused credit for up to ten years.

In addition to the Virginia Form MRD, individuals applying for the MRD credit must also submit Schedule CR. On the other hand, corporations need Form 500CR to claim it. Just like the regular Virginia research tax credit, the application deadline is September 1, with the certification letter arriving by November 30.

How to Calculate the Virginia Research Tax Credit

Primary Method

You can use the primary method to calculate the regular Virginia R&D credit (Form RDC). The amount is equivalent to 15% of the first $300,000 in your Virginia QREs over the base amount. Or if your costs are related to a Virginia university or college, the amount is 20% of the first $300,000 in your Virginia QREs over the base amount.

Alternative Simplified Method

The credit is 10% of the difference between 50% of the average Virginia QREs for the past three tax years and Virginia QREs for the current year. But if your company had no QREs in the past three years, your credit equals 5% of the QREs in the current tax year.

MRD Expenses Tax Credit

Businesses with VA QREs of more than $5 million during the claim tax year qualify for the MRD expenses credit. The credit is equivalent to 10% of VA QREs over the base amount for the current taxable year. You can calculate the base amount by taking 50% of the average QREs for the past three years.

Important to note: No matter the calculation method, the application deadline is September 1, and the award letter won’t arrive until late November. That means you’ll need to file an updated return after receiving the credit certification or request an extension of time to pay any tax due.

Virginia Research and Development Tax Credit: Takeaway

The state allows an individual and corporate income tax credit for conducting qualifying research activities called the Virginia R&D tax credit. However, the application process for this credit tends to be a bit more complex than the federal R&D tax credit, requiring more supporting details and schedules. For this reason, it might be wise to hire experts to successfully get you through the process.

FAQs

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

Partnerships, LLCs, S-Corporations, C-Corporations

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

You must mail your application by September 1 (postmarked by 9/1).

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

Claim period Virginia QREs (Qualified R&D Expenses)

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

Gross Receipts for the past four years, as well as Virginia QREs for the past three years.

Is credit carryforward an option in Virginia?

Carryforward is only possible for MRD — up to ten years.