How to Claim the Pennsylvania State R&D Tax Credit

Research and Development (R&D) tax credits offer significant incentives for businesses investing in innovation. Along with the federal credit, many states offer the opportunity to claim an additional state credit for R&D work done in that state. Pennsylvania is one such state, and there are a couple of things that businesses should consider when looking to claim the state credit there: 

What Is the Pennsylvania State R&D Tax Credit? 

The Pennsylvania R&D Tax Credit incentivizes businesses to increase spending on R&D activities within the state. It allows companies to claim a percentage of their qualified research expenses (QREs) as a credit against their state tax liability. Credits are available to business entities conducting eligible research activities in Pennsylvania.  

Who Qualifies for the Pennsylvania State R&D Tax Credit? 

To qualify, your business must: 

• Engage in R&D activities that meet the federal definition under Section 41 of the Internal Revenue Code. 
• Incur QREs, which typically include wages for employees conducting research, supplies used in the research process, and contract research expenses.
• Conduct the R&D activities within Pennsylvania. 

Both established companies and startups can apply for the credit.  

How to Calculate the Pennsylvania State R&D Tax Credit 

• The calculation method for the state credit uses a base amount of either your prior years’ average Pennsylvania R&D expenditures, or 50% of the current year’s average Pennsylvania R&D expenditures, whichever is greater. Additionally, you must have at least 2 years of R&D expenditures.  
• The state credit itself is tentatively calculated as 10% of the qualified expenses that exceed the base amount for a large business, and 20% of the excess for a small business with less than $5 million in assets at the start or end of the tax year. 

Applying for the Credit 

1. File the Application: Submit the R&D Tax Credit application to the Pennsylvania Department of Revenue through the myPennsylvania Tax Hub between August 1 and December 1 of the year following the tax year in which the QREs were incurred. 
2. Provide Supporting Documentation: Include detailed records of your R&D expenses, such as payroll data, supply costs, and contractor invoices. 
3. Approval Notification: The state notifies applicants of approved credits in May of the following year.  
4. Sell or Assign Credits (if applicable): Pennsylvania allows businesses with unused R&D tax credits to sell or assign them to other taxpayers if the credit amount exceeds the business’s tax liability for that year. This feature can be particularly advantageous for startups with limited tax liability. Unused credits can also be carried forward for up to 15 years.  

Tips for Maximizing the Credit 

• Leverage Federal and State Credits: Pennsylvania’s R&D credit complements the federal R&D Tax Credit, allowing you to optimize savings at both levels.
• Keep Comprehensive Records: Maintain documentation of your R&D activities and expenses to support your claim, making it easier when it comes time to complete your study.
• Seek Professional Assistance: Partnering with R&D tax credit experts can help ensure accurate calculations and compliance with state requirements. 

Claim your credit today! 

The Pennsylvania R&D Tax Credit is a powerful tool for fostering innovation and offsetting the costs of research and development. By understanding the eligibility criteria and application process, your business can take full advantage of this opportunity to reduce state tax liability and reinvest in growth. Don’t leave money on the table—start exploring how your business can claim this valuable credit today!