On March 28, 2011 Virginia Governor Robert McDonnell signed into law a new Research & Development (R&D) tax credit for companies conducting research in Virginia. The R&D credit is effective for tax years on or after January 1, 2011 and before January 1, 2016. In general, the credit is equal for 15% of the first $167,000 of qualified Virginia research and development expenses OR 20% of the first $175,000 of Virginia qualified R&D expenses if the research was conducted in conjunction with a Virginia public or private college or university. The qualified R&D expenses must exceed a three prior base amount which is calculated by determining the average amount of qualified research and development expenses for the three years preceding the year in which the credit is being claimed divided by Virginia gross receipts for the three years preceding the year the credit is being claimed. This base period percentage is then multiplied by the average Virginia gross receipts for the preceding four taxable years to determine the base amount. Then the first $167,000 of Virginia qualified research and development greater than the base amount is eligible for the 15% R&D tax credit or the first $175,000 of Virginia qualified research expenses paid to a Virginia college or university greater than the base amount is eligible for the 20% credit.
A company can only claim one of these two R&D credits in a tax year. Therefore, the maximum yearly credit is either $25,050 for the regular credit or $30,000 for the college or university related credit. The state credit is also limited to a total of $5 million per year for all applicants. Applicants must complete and file Form RDC and supporting documentation by April 1 of the subsequent year the credit is being applied for. The form requires a significant amount of information such as detail of the date of the qualified expenditure, a description of the expenditure, total qualified research expenses, an outline of the research being conducted in Virginia, detail of the qualified wages per employee, location where the research was conducted, and a copy of the research agreement if reporting expenses in connection with a Virginia public or provide college or university. The credit must be approved by the state before being claimed on the tax return.
An important fact to consider is that this credit is refundable, therefore, even if you can’t offset the credit against Virginia income tax your company can get a tax refund for the amount of the credit.