Will Recent Changes to the Virginia Legislation Impact Your R&D Tax Credit Benefits?

At a glance

• The main takeaway: Virginia signed a new law on April 11, 2024, that modifies credit caps and calculation processes for the state’s R&D tax credits to prioritize benefits for smaller companies.
• Impact on your business: Companies that have benefited from Virginia R&D tax credits in the past may need to reconsider their calculation methods to receive their credit. Applications for the 2023 tax credits are due September 1^st.
• Next steps: Aprio’s team of R&D specialists is here to educate and advise you on these legislation changes and evaluate any impact they may have on your company’s benefits.

The Full Story

On April 11, 2024, Virginia Governor Glenn Youngkin signed a law modifying the state’s R&D tax credits, which allow taxpayers that engage in qualified R&D activities to offset income or bank franchise tax. Specifically, this new legislation decreases the credit cap and provides a new credit calculation and per-taxpayer annual cap for the Major R&D (“MRD”) Tax Credit, while increasing the R&D Tax Credit (“RDC”) cap. These changes are expected to significantly impact the tax advantages for businesses that have benefitted from these incentives in the past, with potentially lucrative results for small businesses.

MRD vs. RDC

Virginia provides two different tax credit opportunities to companies investing in research and development in the state: the RDC and the MRD. Both credits aim to incentivize taxpayers to perform R&D activities in Virginia. Historically, the primary differences between these credits revolved around the total qualified research expenses (QREs) the taxpayer paid or incurred during the tax year.

• MRD: Companies that spent over $5 million on qualified R&D expenses could apply to receive the nonrefundable MRD tax credit and offset a maximum of 75% of their taxable income. The MRD credit percentage was equivalent to 10% of the company’s QREs and any unused credits could be carried forward for up to 10 years.

• RDC: Companies that spent $5 million or less on qualified R&D activities could apply for the RDC, a refundable incentive that was equivalent to 15% of the first $300,000 incurred in the tax year, up to an annual limit of $45,000. Any amount excess of that limit was paid to the taxpayer as a refund.

The New Legislation

For tax years beginning on or after January 1, 2023, but before January 1, 2025, both R&D tax credits can now be applied against the corporate income tax, individual income tax, or bank franchise tax. This new flexibility provides an opportunity for eligible companies to reconsider their tax strategy and potentially utilize R&D credits in a more lucrative way. For example, companies eligible for the RDC may be able to claim the credit against Pass-Through Entity (“PTE”) taxes.

Under the new step-rate structure, the MRD credit percentage is 10% of the first $1 million in QREs and 5% of QREs in excess of $1 million. If a taxpayer lacked QREs in any of the three preceding tax years, the credit will continue to equal 5% of the Virginia QREs paid or incurred by the taxpayer during the relevant taxable year. The new legislation also imposes an annual per-taxpayer cap of $300,000 for the MRD credit. Additionally, whereas the previous aggregate credit cap was $24 million, the aggregate cap has now been reduced to $16 million.

While this legislation could reduce credit amounts for companies that historically claimed the MRD, companies benefiting from the RDC could see credit amounts rise. For tax years beginning on or after January 1, 2023, the aggregate cap has been increased from $7.77 million to $15.77 million for each fiscal year beginning with FY2024. In prior years, many companies qualifying for the RDC were unable to benefit from the full credit amount they qualified for due to the aggregate cap reducing credit amounts for all qualifying companies. By increasing the aggregate cap so substantially, smaller companies will likely now be able to claim a larger piece of the pie, so to speak.

The Bottom Line

Legislation regarding R&D credits is constantly evolving at the federal and state levels, and it is critical for businesses to understand the nuances of new requirements and regulations. Tax credits provide lucrative opportunities to eligible companies, but compliance is critical. To maximize your credit amount while prioritizing compliance with all federal, state, and local laws, consult an experienced advisor.

Governor Youngkin’s law will take effect July 1, 2024, and will therefore impact 2023 tax credits. To understand the full scope of the potential impact on your tax burden, schedule a consultation with Aprio’s R&D tax credit advisors to learn more about maximizing your Virginia R&D tax credits.

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