State Research and Development Tax Credits: Navigating Multi-State Apportionment Rules

For many small and medium sized businesses, R&D tax credits are one of the most underutilized of all tax benefits. This is particularly true for companies operating in multiple states. Tax advisers face challenges in navigating various states’ rules on qualified research expenditures, determining when state rules deviate from federal R&D tax credit treatment, and identifying sourcing rules when claiming tax benefits for R&D expenditures.

The majority of states offer tax incentives for R&D expenditures. While most states conform to federal practice in determining what activities qualify for R&D benefits and calculation of qualified research expenditures (QREs) eligible for credit, there are some significant differences. Advisers can avoid state tax by structuring research activities to occur in jurisdictions with the most favorable R&D tax benefit regime.

Beginning with the 2016 tax year, Congress made two massive changes to expand the federal benefits of R&D credits. Startup companies, defined as firms with less than $5M in annual gross receipts and no gross receipts for more than five tax years may utilize the federal credit against payroll tax liability as opposed to income tax liability. Eligible companies may also apply R&D credits to offset AMT liabilities. These initiatives make claiming the R&D credit even more attractive, and make a thorough grasp of the rules for documenting R&D activities even more critical for tax advisers.

States have slightly different methodologies for calculating credit amounts and varying approaches to providing tax benefits to startups or companies with net operating losses. So, companies operating in multiple states often miss out on this crucial tax benefit. R&D activities in a state may create or affect income apportioned to the state, such as payroll or property increasing income apportioned to a three-factor state where R&D activities occur.

Listen as our experienced panel provides a thorough and practical review of calculating, claiming and substantiating a Section 41 R&D credit.

1. States offering R&D tax credits and incentives
2. Variances from federal rules in calculating of QREs for purposes of calculating tax credits
3. Sourcing rules
4. States’ approaches to calculating inclusion ratios and apportionment
5. Documentation requirements

The panel will discuss these and other important topics:

• States that offer tax incentives for R&D activities
• States’ approaches for providing R&D tax incentives for startup enterprises and companies with net operating losses
• States’ variances from federal rules in calculating QREs
• Various state rules for calculating inclusion ratios and apportionment factors for R&D credits

Learning Objectives

After completing this course, you will be able to:

• Ascertain states that offer tax incentives for costs attributable to research and development activities
• Identify differences in various states’ methods for determining QRAs eligible for R&D tax credits
• Determine states’ rules for calculating QREs for inclusion in tax credit computation
• Recognize R&D tax incentives states offer to startup entities and companies with net operating losses other than carry-forwards

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing business tax forms and schedules. Specific knowledge of business taxation, research and development tax credits, creditable expenses, qualified research activities, and documentation required to claim the IRC 41 tax credit; familiarity with allocation methods for qualified research expenditures, AMT, and definition of internal use software.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).