Are R&D Tax Credits Available in Massachusetts?

The state of Massachusetts provides the Research and Development (R&D) Tax Credit which closely parallels the federal research credit available under Sec. 41 of the Internal Revenue Code as of August 12, 1991. Below are some of the differences between the federal and Massachusetts research credits:

  • The Massachusetts research credit is equal to the sum of:
    • 15% the incremental basic research payments; and
    • 10% of the incremental qualified research expenses.
  • If the taxpayer did not have qualified research expenses in any one of the three taxable years preceding the taxable year for which the credit is being determined, the amount of the credit is equal to 5% of the taxpayer's qualified research expense for the taxable year.

The amount of credit is limited to:

  • 100% of the corporation's first $25,000 of corporate excise tax liability; and
  • 75% of such liability over $25,000.
  • The credit cannot reduce the tax below the minimum tax of $456.
  • An S corporation may apply for the research credit against its excise tax due under Chapter 63, but may not share any excess credit with its shareholders.
  • For unincorporated entities, such as partnerships and joint ventures, the credits that are paid or received by such entities shall be attributed to the owners of the entities and shall be taken into account in determining the credit for the taxable year during which the taxable year of the unincorporated flow-through entity ends.

Unused credits may be carried over to future years as follows:

  • A corporation may carry over for an unlimited period of time any portion of the credit which is disallowed under the 75% limitation.
  • Any credits disallowed which are not given unlimited status, may be carried forward for 15 years.
  • Life science companies that have unused standard Massachusetts research credits for prior tax years may request a refund of credits of up to 90% of the remaining balance

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)

Massachusetts R&D Tax Credit Case Study

A Massachusetts life sciences company with fewer than 100 employees had never before claimed the R&D Tax Credit. This project involved a multi-year study.

The Company qualified for the federal R&D Tax Credit of $312,666 and an additional $81,250 in Massachusetts state R&D Tax Credit.

FEDERAL
MASSACHUSETTS
Year
Total QREs
Credit
Total QREs
Credit
2020
$1,400,000
$141,166
$1,400,000
$43,750
2019
1,000,000
98,000
1,000,000
25,500
2018
750,000
73,500
750,000
12,500
Total $3,150,000 $312,666 $3,150,000 $81,250

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