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We’re excited to kick off a new series where we’ll provide information about the R&D credit in a different state each month. This month, we are starting with Pennsylvania! 

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. 

Webinar_november_events_epsa_sponsorsAt 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. 

What happens after September 15 for your Tax Credit Claim ?

After September 15th, Pennsylvania will review the applications and send award letters to all applicants. Unfortunately, it is unlikely that a company will receive 100% of the amount it applied for, as there is a total tax credit cap of $55,000,000 and usually more than $55,000,000 is requested each year.   

Once a company does receive its award, it can use the credit to offset Corporate Net Income Tax and/or Pennsylvania Personal Income Tax. Any unused credits may be carried forward for up to 15 years but cannot be carried back.   

And one final item that often gets overlooked – unlike the federal credit, Pennsylvania research credits are transferable with approval from the Department of Community and Economic Development. This can be very valuable for companies with significant R&D spend with limited tax liability! 

Interested in learning more about how your company may be able to take advantage of the Pennsylvania R&D credit?  Submit your information here