Pennsylvania R&D Tax Credit Summary

Yes. The state of Pennsylvania provides the Research and Development (R&D) Tax Credit very similar to the federal version including the definition of qualifying research. Below are some of the differences between the federal and Pennsylvania research credits.

  • Pennsylvania caps its total R&D credit at $60 million ($12 million set aside for qualified small businesses).
  • The credit rate in Pennsylvania is 10% (20% for qualified small businesses). A Pennsylvania qualified small business (QSB) is defined as any for-profit corporation, LLC, partnership, or proprietorship with assets of less than $5 million in the year qualified research expenses are incurred.
  • Pennsylvania offers a modified Alternative Simplified Credit
  • Qualified research must take place in Pennsylvania.
  • Excess Pennsylvania research credits can be carried forward for fifteen years and are not refundable.
  • Currently, there is no sunset provision for Pennsylvania’s R&D credit.
  • Qualified taxpayers must submit an application to the Pennsylvania Department of Revenue’s online system, myPATH, for research expenses incurred in taxable year that ended in the prior calendar year. The application window opens on August 1, and all applications must be submitted by December 1.

Pennsylvania R&D Tax Credit Case Study

A company in Pennsylvania, Pennsylvania claims R&D Tax Credits each year for the development activities of its engineers. This project involved a multi-year study covering the tax years 2018 – 2021.

The Company qualified for federal R&D credits of $359,917 and an additional $148,750 in Pennsylvania.

FEDERAL
PENNSYLVANIA
Year
Total QREs
Credit
Total QREs
Credit
2021
$1,300,000
$135,333
$1,300,000
$65,000
2020
900,000
91,000
 900,000 43,750
2019
650,000
63,000
 650,000 27,500
2018
450,000
38,500
 450,000 12,500
Total $3,300,000 $359,917 $3,300,000 $148,750

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

Four-Part Test

Qualified research activities are defined by the four-part test outlined below

Technological in Nature
Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

Permitted Purpose
Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

Eliminate Uncertainty
Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

Experimentation
All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.