State Level R&D Tax Credit Programs: The Ultimate Guide for Founders and CEO's

As a founder or CEO, have you been looking for a way to boost innovation and development in your company? As we know, research and development (R&D) can play a crucial role in enabling companies to improve their products and services. However, carrying out such activities can also be expensive, and many companies struggle to allocate the necessary funds. 

This is where state-level R&D tax credit programs come into play. These incentives can provide crucial financial support for businesses that are conducting qualified R&D activities. In this blog post, we’ll delve into the specifics of state-level R&D tax credit programs and how they can help you and your team.

What exactly are state-level R&D tax credits?

State-level R&D tax credits are incentives provided by state governments to encourage companies to conduct more R&D activities. These incentives provide a deduction on a company's state income taxes equivalent to a percentage of the company's qualified research expenditures. Many states offer these programs, but the specifics of each can vary widely. Typically, these programs are designed to balance the costs and benefits of conducting R&D for businesses.

Which states have R&D tax credit programs?

Many states have R&D tax credit programs. In fact, 38 states have their own R&D tax credit programs. 

Some of the most popular ones are California, New York, Texas, Massachusetts, and Ohio. The specifics of each state's program will vary, such as the percentage of eligible expenses that can be claimed and the eligibility criteria for each program. Before applying, it is important to thoroughly research the specifics of each program to see which one is the best fit for your company.

What qualifies as R&D?

To be eligible for state-level R&D tax credits, companies must conduct qualified R&D activities that satisfy specific criteria. The Internal Revenue Service (IRS) defines R&D as activities that satisfy the four-part test. These four parts include the activities related to the creation of new, improved, or technically advanced products or processes. 

For example, the R&D activities might be related to developing new software, creating new products, or enhancing existing products. By spending time on these activities, companies can then claim R&D expenses under their respective state-level tax credit program.

Things to Keep in Mind

For companies looking to benefit from R&D tax credits, there are a few key things to keep in mind.

Entity Structure

Most participating states recognize C-Corporations, S-Corporations, LLCs, and Partnerships as qualifying innovation tax credit entities. However, some states like Florida, Rhode Island, and Connecticut only allow C-Corporations to qualify for the benefit. Additionally, Massachusetts allows both C-Corporations and S-Corporations to file for deductions.

Deadline for Filing

Typically, taxpayers are obligated to claim the R&D tax credit while submitting their state tax return, as per local regulations. Nevertheless, specific states like Virginia, Pennsylvania, New Hampshire, Florida, Maryland, Arkansas, and Delaware offer varying deadlines for filing the credit.

Carryforward Credit

The duration of carryforward credits varies among participating states. In some jurisdictions, local laws permit an unlimited carryforward period, while others specify specific timeframes ranging from 3 to 20 years. Moreover, some states may permit or prohibit carrying credits back.

How to Maximize your State R&D Credits

It's essential to keep detailed records of your R&D activities. This will be necessary when claiming R&D tax credits. 

Secondly, it’s a good idea to work with an experienced accountant or tax professional to ensure that you maximize your tax credit eligibility. For example, some expenses related to R&D activities might be more eligible for tax credits than others. Finally, align your R&D activities with your company's long-term strategic goals to ensure that you see meaningful benefits from your efforts.

State-level R&D tax credit programs can provide crucial financial support for companies engaging in qualified R&D activities and can help them achieve their strategic objectives. By implementing the tips outlined above, and carefully researching program specifics, companies can benefit from these incentives. 

These programs may differ from state to state, but the benefits of these programs remain significant. Companies with ambitious R&D goals should explore and take advantage of these opportunities to help their innovations come to life.