Pennsylvania’s R&D Tax Rules: What Businesses Should Know

Recent federal guidance allows taxpayers to immediately expense research and development (R&D) costs rather than amortizing them over several years. However, Pennsylvania has taken a different approach, and understanding these rules is critical for compliance and planning.

How Pennsylvania Differs from Federal Rules

Pennsylvania does not follow the federal relief provisions. Instead, it applies a phased deduction method:

· The state adds back the federal amortization deduction to taxable income.

· Then, it provides an additional deduction equal to 20% of the remaining unamortized amount each year until the full amount is claimed.

This means that in Pennsylvania deductions are spread out over time rather than taken immediately.

Your Options

· Do not amortize under Section 174 Moving forward, taxpayers can deduct all Pennsylvania-related R&D expenses immediately if they elect not to amortize under Section 174

· Continue amortizing under Section 174 For tax years where research expenses are amortized, Pennsylvania allows an additional deduction to accelerate amortization, but only gradually:

o Domestic expenses: 20% of total qualified research expenses (QREs).

o Foreign expenses: 20% of the remaining unamortized QREs.

This distinction slows down the deduction for foreign expenses compared to domestic ones.

Example: How the 20% Deduction Works

Assume $100,000 in qualified R&D expenses amortized under Section 174:

Year Remaining Balance Additional PA Deduction (20%)

Year 1 $100,000 $20,000

Year 2 $80,000 $16,000

Year 3 $64,000 $12,800

Full relief takes several years, unlike the federal approach that allows immediate expensing.

PA vs. Federal Rules at a Glance

Feature Federal Pennsylvania

Immediate deduction allowed? ✅ Yes ❌ No

Amortization required? ❌ No ✅ Yes (phased via 20% rule)

Additional deduction? N/A ✅ 20% of remaining balance

Key Takeaways

· Taxpayers who amortized R&D costs between 2022 and 2024 will not receive full relief in Pennsylvania immediately.

· Going forward, most taxpayers may choose not to amortize under Section 174 now that federal rules allow immediate expensing.

Conclusion Pennsylvania’s phased approach to R&D deductions creates a significant difference from federal treatment. Businesses should review their strategy carefully to ensure compliance and optimize deductions.