Are R&D Tax Credits Available in Maryland?

Yes. The state of Maryland provides the Research and Development (R&D) Tax Credit for businesses with qualified research expenses (QREs) in Maryland may qualify for two state income tax credits, the Basic R&D Tax Credit and the Growth R&D Tax Credit. Here is a summary of the credits:

  • The Basic R&D Tax Credit equals three percent (3%) of QREs that do not exceed the Maryland Base Amount.
  • The Growth R&D Tax Credit equals ten percent (10%) of QREs in excess of the Maryland Base Amount.
  • The Base Amount is determined by dividing the aggregate QREs by the aggregate Maryland gross receipts for the four years prior to the credit year.
  • The total amount of credits approved for all businesses in the state may not exceed $12 million.
  • Maryland follows the federal definition of qualified R&D and QREs, as defined by § 41(b) of the Internal Revenue Code in Maryland.
  • The business must submit an application by November 15th for expenses incurred in the previous calendar year.
  • R&D tax credits certified after December 15, 2012, are refundable for "small businesses" to the extent that the tax credits exceed the income tax liability for that taxable year.
  • Credits that exceed the income tax for a taxable year, may be carried forward for the next seven years or until used.
  • All members of a controlled group of corporations are treated as single taxpayers for the purposes of the credit.
  • The tax credit remains in effect until January 1, 2026, subject to extension by the General Assembly.

What are the Potential Benefits of this Tax Credit?

There are several benefits to realizing the R&D tax credit. These benefits can include the following:

  • Receive up to 12-16 cents of federal and state R&D tax credits for every qualified dollar
  • Create a dollar-for-dollar reduction in your federal and state income tax liability
  • Increase earnings-per-share
  • Reduce your effective tax rate
  • Improve cash flow
  • Carry forward the credit up to 20 years
  • Perform look back studies to recognize unclaimed credits for open tax years (generally 3 or 4 years)
  • Utilize the federal R&D tax credit against payroll tax (applicable to certain startup companies)

Maryland R&D Tax Credit Case Study

An Annapolis firm designs components for the telecommunications industry. The company claims R&D credits each year for the design and development activities of its engineers. This project involved a multi-year study.

The Company qualified for The federal R&D Tax Credit of $847,000 and an additional $147,000 in Maryland state R&D Tax Credit.

FEDERAL
MARYLAND
Year
Total QREs
Credit
Total QREs
Credit
Year 4
$3,000,000
$261,333
$3,000,000
$149,500
Year 3
2,600,000
224,000
NA
NA
Year 2
2,200,000
184,333
NA
NA
Year 1
2,000,000
177,334
NA
NA
Total $9,800,000 $847,000 $3,000,000 $149,500

You can read more about this Maryland tax credit case study here.