Will Your R&D Tax Credit be Reduced under the New Law?December 02, 2014
Update on the implications of the major revision to the Massachusetts R&D Tax Credit for taxpayers.
Last August we informed you of a major revision to the Massachusetts R&D Tax Credit included in the Governor’s Economic Development legislation. The new law is effective for tax years beginning on or after January 1, 2015, and is intended to spur research activity and the economic growth that it brings. However, as is often the case with complex tax provisions the devil is in the details, and some taxpayers will actually find their credit reduced under the new law.
A key component of the credit calculation is a taxpayer’s “fixed base percentage”. Without going through all the mechanics of the calculation, a low fixed base percentage helps to maximize the R&D credit. Under current law, the fixed base percentage is the ratio of R&D spending for the years 1984 to 1988 over gross receipts from this same period, not to exceed 16%. Taxpayers that were not in existence in 1986 are assigned a “start-up” fixed base percentage of 3%. Taxpayers that have been in existence since 1987 or earlier, but do not have records available to do the calculation, are assigned the maximum fixed base percentage of 16%. Under the new law the fixed base percentage is calculated by reference to the 3rd and 4th years preceding each year the credit is claimed.
Taxpayer’s currently using the 3% fixed base percentage, or whose records from 1984 to 1988 support a low fixed base percentage, may find that their fixed base percentage increases under the new law, resulting in a lower credit. Conversely, taxpayers that are currently required to use 16% as their fixed base percentage may find an increase to their credit from the new law.
The new law also creates a new option for taxpayers to elect an “Alternative Simplified Research Credit”. This credit is a percentage of the current year R&D expenses that exceed 50% of the average R&D expenses in the three prior years. All taxpayers with R&D expenses will want to evaluate whether to elect to claim this credit instead of the regular R&D tax credit. The Department of Revenue will soon be releasing a regulation with guidance about the new R&D tax credits and election procedures for the Alternative Simplified Research Credit.
We are closely monitoring this change and are available to discuss your options under the new law. Contact the KLR State and Local Tax Group for more information.