Federal and State R&D Credits: Comparing Federal and State Guidelines, Eligibility Requirements, Retroactive Application

This course will review the research and development (R&D) credits offered by states. Our panel of state and local tax specialists will explain the credit requirements in specific states, review the federal guidelines for the R&D credit, and explain the process of applying for missed credits in prior years.

R&D credits are a valuable, often overlooked, tax incentive. Even small businesses making minor improvements to a product or process can qualify. As a tax credit rather than a tax deduction, the R&D credit can provide dollar-for-dollar tax savings for cash-strapped businesses. Companies that missed the credit in the past could be eligible to claim the credit retroactively.

Tax practitioners who only consider the federal R&D credit could be overlooking half the tax savings of this credit. Currently, more than 35 states offer an R&D credit. Many states follow the federal guidelines, but there are differences. Utah's R&D credit, for example, is the sum of three credits:

• 5 percent of qualified expenses for increasing research activities in Utah above a base amount;
• 5 percent of certain payments made to a qualified organization increasing basic research in Utah above a base amount; and
• 7.5 percent of qualified research expenses in Utah for the current taxable year.

California does not allow an R&D credit to be carried back but does allow the credit to be carried forward indefinitely. Most states follow the federal definition of qualified research expenditures. SALT practitioners working with multistate businesses need to know which states offer this valuable credit and the states' eligibility requirements.

Listen as our panel of SALT experts provides specific state examples of the R&D credit for advisers working with multistate businesses.