Are R&D Tax Credits Available in Virginia?

Yes. The state of Virginia provides the Research and Development (R&D) Tax Credit which allows a refundable individual and corporate income tax credit for conducting qualified research and development in Virginia, to the extent a taxpayer's Virginia qualified R&D expenses (QREs) exceed a base amount. Here is a summary of the credits:

  • The credit is allowed in the taxable year in which qualified R&D expenses are reported on the federal income tax return.
  • Virginia's R&D tax credit follows IRC Section 41 rules for qualified activities and expenses and follows a modified version of the federal regular credit method.
  • The R&D credit is comprised of a base credit and a supplemental credit that is available only to the extent that the total amount of credits granted for a fiscal year is less than the annual credit cap ($7.7 million for tax years 2021 -2024).
  • The base credit is equal to 15 percent (15%) of the first $300,000 in Virginia QREs paid or incurred by the taxpayer during the credit year.
  • An increased credit rate (20%) is available for qualified expenses paid to a Virginia college or university.
  • Virginia also offers an alternative simplified credit method. Using this method, the credit is 10 percent (10%) of the difference between qualified research expenses of the credit year and 50 percent (50%) of the average qualified research expenses incurred during the three prior tax years.
  • The total amount of credits under the alternative simplified credit method may not exceed $45,000.
  • If the total eligible credit requests exceed the $7.77 million credit cap for all credits, each taxpayer will be granted a pro-rata amount of credits as determined by the Department.
  • An eligible taxpayer must submit an Application for the Research and Development Expenses Tax Credit, Form RDC, and any supporting documentation to the Department no later than September 1 of the year following the credit year.

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)

Virginia R&D Tax Credit Case Study

A firm in Norfolk, Virginia designs components for the maritime 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 covering the tax years 2018 – 2021.

The Company qualified for the federal R&D Tax Credits of $196,000 and an additional $98,235 in Virginia state R&D Tax Credits.

FEDERAL
VIRGINIA
Year
Total QREs
Credit
Total QREs
Credit
2021
$750,000
$70,000
$750,000
$35,100
2020
$550,000
$45,500
$550,000
$20,625
2019
$500,000
$42,000
$500,000
$21,000
2018
$450,000
$38,500
$450,000
$21,510
Total $2,250,000 $196,000 $2,250,000 $98,235

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