Are R&D Tax Credits Available in Rhode Island?

The state of Rhode Island provides the Research and Development (R&D) Tax Credit which allows a taxpayer to claim credits for both research and development property and qualified research expenses. Here is a summary of the credits:

Research Credit – Research and Development Property

  • The amount of the credit is equal to 10% of the cost of the research and development property.
  • Eligible properties are tangible personal property and other tangible property, including buildings and structural components of buildings, that are acquired, constructed, reconstructed, or erected for certain research and development purposes after July 1, 1994.
  • To be eligible for the credit, the property must be:
    • Depreciable under IRC §167 or recovery property with respect to which a deduction is allowable under IRC §168 (MACRS).
    • Classified as having a useful life of three or more years.
    • Acquired by purchase as defined in IRC §179(d).
    • Used principally for purposes of research and development in the experimental or laboratory sense.
    • Located in Rhode Island.
  • The credit is not allowed for tangible personal property and other tangible property, including buildings and structural components of buildings, that is leased to any other person or corporation. Any contract or agreement to lease or rent or for a license to use such property is considered a lease.
  • The credit may not reduce the tax below the amount of the minimum tax imposed on corporations.
  • Any unused credit may be carried forward up to 7 years.

Research Credit – Qualified Research Expenses

  • The credit is 22.5% for QREs up to $111,111 and 16.9% for the remaining QREs, which exceed the base period expenses.
  • QREs and base period expenses have the same meaning as defined in IRC Section 41, provided that such expenses were incurred after July 1, 1994.
  • The investment tax credit and the credit for research and development property must be used before the credit for qualified research expenses.
  • The credit allowed shall not reduce the tax liability by more than 50%, and in the case of corporations, to less than the minimum fixed by  RI 44-11-2(e)
  • Any unused credit may be carried forward up to 7 years.

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)

Rhode Island R&D Tax Credit Case Study

A Providence company designs and manufactures medical instruments for the health services industry. The company claims the R&D Tax Credit each year for the development activities of its engineers. This project involved a multi-year study.

The company qualified for the federal R&D Tax Credits of $204,167 and an additional $271,347 in Rhode Island state R&D Tax Credits.

FEDERAL
RHODE ISLAND
Year
Total QREs
Credit
Total QREs
Credit
Year 4
$700,000
$56,000
$700,000
$73,822
Year 3
650,000
52,500
650,000
69,597
Year 2
600,000
49,000
600,000
65,372
Year 1
550,000
46,667
550,000
62,556
Total $2,500,000 $204,167 $2,500,000 $271,347

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