Are R&D Tax Credits Available in Virginia?

Are R&D Tax Credits Available in Virginia?

No. Virginia's two state R&D tax credits, the Research and Development Expenses Tax Credit (RDC) and the Major Research and Development Expenses Tax Credit (MRD), expired for taxable years beginning on or after January 1, 2025. Previously certified credits may still be available for carryforward or use under applicable rules.

While the state credits have sunset, Virginia businesses still have options:

  • State and Local Incentives. Virginia offers other business incentives beyond R&D credits, including grants, tax exemptions, and location-based programs. KBKG's Negotiated Incentives team helps businesses identify and secure state and local incentives tailored to their operations and growth plans.

See if you qualify for tax credits, deductions, or cost recovery services by requesting a proposal.

Frequently Asked Questions

How do I know if my business qualifies for this credit?

R&D tax credit eligibility largely depends on whether the work you are conducting meets the criteria established by the IRS and its four-part test.

Can you amend prior year returns to claim the credit?

Yes, provided the tax year is open under statute.

Is it worth calculating the R&D credit if there's net loss and no tax due in the coming several years?

If the Company has W2 Wages with a related payroll expense, it is very beneficial to calculate the credit to take advantage of the payroll tax offset.

For a startup company with no sales receipt, is it true that no R&D credit is calculated because there is no fixed-based ratio?

Not necessarily. There are two credit calculation methodologies. Startup companies without gross receipts can use either methodology and still generate a credit.

For the fixed-based percentage, does this percentage change from year-to-year, or is it a historical percentage that you use each year after your initial year of having the research credit?

For companies that had R&D activities and gross receipts in 1984-1988, the fixed-based percentage is calculated and gets fixed. However, for the companies that started after, the fixed-base percentage gets fixed at the 11th year.

Would legal fees for drafting and filing patent applications qualify as "activities from concept through release to commercial production?"

This is very facts and circumstances dependent. Patent application and perfection costs qualify as Section 174 R&D expenses. Some clients use this qualification to include in the R&D credit calculation. Under Section 41, guidance was issued concluding these costs are non-creditable.

Are payroll taxes included in qualified wages for R&D credit purposes?

Unfortunately, not.

Can payroll taxes include expenses paid against qualified wages?

Payroll taxes include the FICA portion of your payroll taxes.

Will this work for startup companies whose payroll is paid by a paymaster?

As long as the taxpayer meets the definition of having employees, then yes. If using a PEO, then the taxpayer is eligible for the payroll credit.

Are R&D credits still considered to be a Tier 1 audit issue?

R&D tax credits are not a Tier 1 issue anymore.

Can depreciation ever be considered a qualified expense?

Unfortunately, no.

Can you receive a payroll tax refund?

Yes, the payroll tax benefit is in the form of a refund.

How much do you charge for an R&D Study?

It depends on a few factors. We generally provide our clients with options both in terms of fee structure and project scope. With respect to fee structure, we normally offer our clients both a fixed fee quote as well as time and material engagements, which are capped at a percentage of the credit. Fixed fee and percentage cap amounts can vary depending on a few variables, including the nature of our involvement, the number of employees performing qualified research, the number of projects, and the scope years we look at, among other variables. If you are interested in learning more, we’d be happy to give you a high-level estimate of cost. We would just need a bit of information from you.

Additional Resources