On April 9, 2013, Maryland’s Governor, Martin O’Malley, approved HB 386 extending and expanding Maryland’s research and development (R&D) tax credit.
Maryland’s current R&D tax credit law provides a credit against regular Maryland tax for companies incurring qualified research expenses (QREs) within the state. Maryland currently caps its R&D credits at $6 million per calendar year. It offers two types of credits:
- A basic credit equal to 3% of Maryland QREs paid during the tax year, up to the Maryland base amount1; and
- A growth credit equal to 10% of the Maryland QREs paid during the year which exceeds the Maryland base amount.
The basic credit is determined first, and then the growth credit is calculated. The combination of the two amounts is the total potential credit. To qualify for the R&D tax credits, a business must submit an application no later than September 15th of the year following the tax year the QREs were incurred. The tax year 2012 applications must be postmarked by Monday, September 16, 2013. The application is reviewed and certified after December 15th of the year following the tax year the QREs were incurred. Once certified, the business must attach the certification to its amended Maryland return claiming the R&D tax credit.
In the likely event that State R&D tax credit claims exceed the maximum allowed, the credits are allocated2 among all claimants who have filed their application by the September 15th deadline. R&D expenses, typically categorized as a business expense, are deducted from State tax liability. Maryland requires claimants to add back to Maryland adjusted gross income the amount of any credits claimed. The R&D tax credit was set to expire on June 30, 2020.
New Law: With the passage and approval of HB 386, Maryland’s annual R&D tax credit cap is increased to $8 million of credits. Although the credit calculation and allocation method remain unchanged, the credit may be refundable for eligible small businesses, provided that:
- The business is a for-profit corporation, LLC, partnership, or sole proprietorship; and
- At the beginning or end of the taxable year in which eligible QREs are incurred, the business has a net book value of assets of less than $5 million.
The new law becomes effective June 1, 2013, and applies to all R&D tax credits certified after December 15, 2012. The annual application process remains the same and the credit now sunsets on June 30, 2021.
1. The base amount is equal to the average Maryland QREs incurred by the business during the four years preceding the credit year.
2. The allocation is calculated by multiplying each claimant’s credit applied for by the ratio of the maximum allowable credit for all claimants to the total amount of credits applied for by all claimants.