This month we are continuing our “What’s Happening in Your State?” series, where we provide information about the R&D credit in a different state each month. This month, we are discussing Massachusetts!
1. To claim the R&D Credit, your employees must be working exclusively in Massachusetts
First, to qualify for the Massachusetts R&D credit, your company must be performing R&D within Massachusetts. This is increasingly important as companies allow employees to work remotely. Even if your headquarters are in Massachusetts, if your employees work remotely in other states, the activities of the employees not working in Massachusetts cannot be included in the R&D calculation.
2. Credit calculation for the R&D Credit in Massachusetts in equal to 10% of the excess of the qualified research expenses
Second, the credit calculation is equal to 10% of the excess of the qualified research expenses for the current year over the base amount. The credit is available to all “corporations subject to tax under M.G.L. c. 63 Section 32, and all foreign corporations subject to tax under M.G.L. c. 63 section 39.” S corporations and other flow-through entities “may apply the credit against their corporate excise liability under the non-income, or if applicable, the income measure of the corporate excise tax. The credit cannot be passed through to the individual shareholders or partners.”
3. The specific requirements to claim R&D Credit in Massachusetts States
Third, the activity qualification closely mirrors the requirements for the federal credit. However, Massachusetts instituted a contemporaneous record requirement that is different from the federal credit requirements. Massachusetts now requires that the following records be maintained for each employee included in the R&D credit:
- Name, taxpayer identification number, detailed job description, gross Massachusetts wages paid and Massachusetts wages included in the credit;
- Time cards, internal written documents or other substantially contemporaneous records which verify percentage of time devoted to qualified research activities;
- Organizational chart showing reporting structure for all departments, business units and individuals performing qualified research; and
- Detailed description of each department or business unit performing qualified research and the nature of the research performed.
The contemporaneous record requirement is a significant deviation from the federal requirement, and it is very important that taxpayers comply with the requirement when claiming the Massachusetts R&D credit. While time tracking does make it easier to comply with this requirement, it is not the only way a taxpayer can comply; we’ve used our experience numerous times to help companies claim the Massachusetts credit using other types of contemporaneous documentation such as emails and meeting minutes.
While the Massachusetts R&D credit can be beneficial, especially for C Corporations, the differences between the Federal and Massachusetts credit are substantial and therefore it is very imperative that you work with someone who is familiar with the nuances of the Massachusetts credit calculation.
Interested in learning more about how your company may be able to take advantage of the Massachusetts R&D credit? Submit your information here!