What’s Happening in your State? PENNSYLVANIA Edition!

The Pennsylvania R&D credit has been around for quite some time, but there have been several changes in recent years, including how companies file to claim the R&D credit.  Beginning in 2018, Pennsylvania implemented an online application system, replacing the paper application.  This new online system allows companies to monitor its application status and complete requested action items.  However, this new application requires several pieces of information that were not previously required, including the following: 

1. Description of how the R&D project(s) qualify under Internal Revenue Code Section 41(b) and (d); 
2. List of addresses where R&D project(s) occurred;  
3. Specific detail regarding all third-party/subcontractor labor costs, including name and location; 
4. The prior years’ Pennsylvania R&D expenditures;  
5. A copy of Federal Form 6765 for each year with expenditures; and 
6. If filing as a small business, a copy of the balance sheet showing total assets less than $5,000,000 at the beginning or end of the year. 

At least 2 years of prior R&D expenses to claim the Credit

One other change that started in 2018 was the requirement that a company have at least two years of R&D expenditures.  Prior to 2018, the requirement was only one year of prior R&D expenses. This is especially important for start-up companies, so if you are new company looking to claim the PA R&D credit, make sure you have at least 2 years of prior R&D expenses. 

There are a few other nuances a company should know before claiming the Pennsylvania credit.  First, it is an application state, meaning that a company cannot amend to claim the credit for prior years.  The application is typically available starting in June and it must be submitted by September 15 of the year following the close of a tax year. 

Additionally, the credit itself is equal to 10% of the qualified research expenses that exceed the base amount.  The base amount is the average Pennsylvania qualified research expenses for the four preceding taxable years.  If the company has total assets less than $5,000,000 at the beginning or end of the year, the credits equal to 20% of the qualified research expenses that exceed the base amount.