Refundable R&D Expenses Tax Credit
Effective for taxable years beginning on or after January 1, 2011, but before January 1, 2025, Virginia allows a refundable individual and corporate income tax credit for incurring Virginia qualified research and development expenses during a taxable year.
This is an individual and corporate income tax credit for taxpayers with Virginia qualified research and development expenses under $5 million for a taxable year.
The credit is allowed for the same calendar year in which qualified research and development expenses are reported on the federal income tax return (“the credit year”), in accordance with the taxpayer’s accounting method.
The research of a taxpayer applying for the Refundable R&D Expenses Tax Credit must meet the federal definition of qualified research under IRC § 41(d) to qualify for the credit. Under IRC § 41(d), qualified research means research:
- With expenditures that qualify as expenses under Internal Revenue Code (“IRC”) § 174 (i.e., such expenditures must be incurred in connection with the taxpayer’s trade or business and represent a research and development cost in the experimental or laboratory sense).
- Undertaken for the purpose of discovering information which is technological in nature.
- The application of which is intended to be useful in the development of a new or improved business component of the taxpayer.
- Whose activities all substantially constitute elements of a process of experimentation for new or improved function, performance, reliability, or quality.
To be considered “qualified research,” the taxpayer must establish that the research being performed meets each of the above requirements. Qualified research generally does not include the following:
- Research conducted after the beginning of commercial production.
- Research adapting an existing product or process merely to meet customer specifications (unless the adaptation is carried out under experimental or laboratory conditions in order to improve the product or process, or to develop a new use for the product or process).
- Duplication of an existing business activity.
- Surveys, studies, or routine activities, including: testing or inspection of materials or products for quality control; environmental analysis; testing of samples for chemical or other content; operations research; feasibility studies; efficiency surveys; management studies; consumer surveys; economic surveys; research in the social sciences; market research, including advertising and promotions; and routine data collection.
- Research in the social sciences, arts, or humanities.
- Research conducted outside the United States, Puerto Rico, or a United States possession.
- Research of computer software for internal use (except if the software development contributes to Virginia qualified research and development).
- Any research and development that is already funded by a grant, contract, or another entity, including a governmental entity.
Virginia research and development expenses must meet the federal definition of qualified research expenses under IRC § 41(b) to qualify for the credit. Under IRC § 41(b), qualified research expenses are defined as amounts paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer for:
- In-house expenses
- Contract research expenses
Research and development expenses paid or incurred for research conducted in Virginia on human cells or tissue derived from induced abortions or from stem cells obtained from embryos do not qualify for the credit. However, if a taxpayer engaged in research in Virginia on human cells or tissue derived from induced abortions or from stem cells obtained from human embryos, it may receive a nonrefundable credit for other Virginia qualified research and development expenses. If the amount of nonrefundable credit that a taxpayer is allowed to claim exceeds the taxpayer’s tax liability for the taxable year, then the excess amount of credit will not be refunded to the taxpayer and cannot be carried over to future taxable years. Research and development expenses paid or incurred for research conducted in Virginia on nonhuman embryonic stem cells may qualify for the credit.
Two methods are available for calculating the Refundable R&D Expense Tax Credit. The determination as to which method is used is made at the discretion of the taxpayer. A taxpayer may compute the base credit using the primary method for determining the credit or elect to compute the base credit using the alternative simplified method for determining the credit.
Method One: Businesses may claim a tax credit equal to 15% of the first $300,000 ($45,000) in qualified research and development expenses incurred in Virginia. The credit may increase to 20% of the first $300,000 ($60,000) if the qualified research is conducted in conjunction with a Virginia college or university.
Method Two: Effective for taxable years on or after January 1, 2016, a taxpayer may elect to calculate the credit for this program as 10% of the difference between:
- The Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year; and
- 50% of the average Virginia qualified research and development expenses paid or incurred by the taxpayer for the three taxable years immediately preceding the year for which the credit is being determined.
If a taxpayer did not pay or incur Virginia qualified research and development expenses in any one of the three taxable years immediately preceding the taxable year for which the credit is being determined, the credit, under Method Two, is equal to 5% of the Virginia qualified research and development expenses paid or incurred by the taxpayer during the relevant taxable year.
Taxpayers apply to the Department of Taxation by completing Form RDC. This form and any supporting documentation must be completed and mailed no later than September 1 of the calendar year following the credit year.
The Department of Taxation reviews all applications for completeness and notifies taxpayers of any errors by November 1.
If any additional information is required, it must be provided to the Department no later than November 15 to be considered for the credit.
All eligible taxpayers are notified as to the amount of credits they may claim.
Can this credit be claimed with the Major Research and Development Expenses Tax Credit?
Any taxpayer who is allowed a research and development expenses tax credit is not allowed to use the same expenses as the basis for claiming any other Virginia tax credit. No taxpayer may claim both this credit and the Major R&D Expenses Tax Credit.
How is the average amount of Virginia qualified research and development expenses for the three years determined?
If one or more of the three taxable years preceding the credit year is a short taxable year, then the Virginia qualified research and development expenses for such year must be modified by multiplying that amount by 365 (366 in a leap year) and dividing the result by the number of days in the short taxable year.
What additional documentation is required on Form RDC?
- Outline of the type of research and development being conducted in Virginia.
- Details regarding the qualified contractors: name of the qualified contractor, expenses paid, location where research is conducted, length of time spent on the project, and type of research conducted.
- A copy of the research agreement if reporting expenses in connection with a Virginia public or private college or university.
- Schedule A. If claiming the R&D Credit on the basis of qualified wages, be sure to complete Section 2 of Schedule A in addition to Section 1. Copies of Schedule A can be submitted if additional space is needed. Retain a copy of any supporting documentation of these expenditures.
- Upon request, proof of purchase may be required, such as an invoice, receipt, canceled check, bank statement, or credit card statement.
Where do I send my application for the tax credit?
All applications must be sent to:
Virginia Department of Taxation
Tax Credit Unit
P.O. Box 715
Richmond, VA 23218-0715