Massachusetts Revises its Research and Development Credit
Massachusetts finally says goodbye to the 1980s
Chris DeRosa, Tax Senior Manager
In one of his last acts as the Governor of Massachusetts, former Governor Deval Patrick signed “An Act promoting economic growth across the Commonwealth” (H.4377). Of the many changes enacted under this act, were revisions to the Massachusetts research credit and the addition of an alternative simplified research credit, which took effect for tax years beginning on or after January 1, 2015.
It has been nearly two and a half decades since Massachusetts first introduced its research credit, otherwise known as the “R&D credit.” Since that time, the credit has closely mirrored the federal research credit, applying to research expenses incurred in Massachusetts. The Massachusetts credit, unlike the federal credit, has been established as a permanent credit, avoiding the recent uncertainty and perpetual one year extensions while congress determines whether or not to make a long term commitment to the credit.
Prior to January 1, 2015, the Massachusetts R&D credit offered taxpayers a 10% credit for their Massachusetts qualified research expenses (QREs) in excess of the “qualified research base amount” and a 15% credit for “basic research payments,” The definitions of which are the same as those used in the federal credit in IRC §41. The base amount is the product of the “fixed-base percentage” and the average annual gross receipts of the taxpayer for the preceding 4 taxable years.
The fixed-base percentage could be calculated in different ways, dependent on facts, and the duration of the taxpayer’s existence. The most cumbersome of the calculations required taxpayers to look back to their aggregate QREs for the periods of January 1, 1983 through January 1, 1989. Taxpayers coming into existence during or after that period, were required to use a fixed-base percentage of 3% for the first five years in existence. After the first five years, taxpayers would then calculate their fixed-base percentage using a portion of the aggregate data from their first ten qualifying periods. The recordkeeping requirements, and complexities of the calculations made accurately claiming the credit a daunting task.
One way the federal credit differed from the Massachusetts credit, was the offering of the alternative incremental credit, which was then replaced with the alternative simplified credit. The intent of which was to broaden the taxpayer base qualifying for the credit, by opening the credit to taxpayers that had high gross receipts, flat or declining QREs, or taxpayers that were simply unable to adequately maintain the necessary business records required by the traditional credit.
The Massachusetts reforms to the R&D credit achieve two goals; the first being the simplification of the traditional research credit calculation, and the second being the broadening of the application among taxpayers.
For tax years beginning on or after January 1, 2015, the fixed-base percentage calculation no longer relies on data from the 1980s, or taxpayers’ infancy to determine the appropriate percentage. The fixed-base percentage is now calculated on a rolling basis relying on the aggregate QREs over the average gross receipts for the third and fourth taxable years preceding the year in which the credit is claimed. The record keeping burden is now far more manageable, and taxpayers that were once unable to qualify for the R&D credit, may do so once again.
Additionally, taxpayers may also elect to claim the R&D credit using the alternative simplified method, which will be phased-in in three stages between tax years 2015 and 2021. For tax years 2015 through 2017, the alternative simplified credit will be equal to 5% of the taxpayer’s QREs in excess of 50% of the average QREs for the preceding three years. The credit will be equal to 7.5% for the tax years 2018 through 2020. When fully phased-in for tax year 2021, the credit will be equal to 10%. Taxpayers without QREs in the preceding 3 years will be granted a credit equal to 5% of all QREs.
Taxpayers claiming the credit on their 2015 tax returns, and later, should conduct an analysis using both calculation methods to determine the most advantageous credit for any given year. The credit completely offsets both the Massachusetts corporate income and net worth/tangible property excise, up to the first $25,000, not below the state’s $456 minimum, and is limited to 75% of excess tax thereafter. It also offers a 15 year carryforward.
Ultimately, this seems to be a step in the right direction for those looking for some simplification of a particularly complicated area of tax. While the research credit comes under criticism with respect to its effectiveness, it would be hard to argue with keeping things simple!
The above is meant to serve as a high level overview of changes to the research credit in Massachusetts. For questions specific to your organization please contact Chris DeRosa or your BNN advisor at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.