States battle for R&D investment by enhancing tax incentives.

• Author: Stoddard, Joe
• Position: Research and development

With much of the focus on federal tax issues such as overhauling the tax system, state tax issues often set lost in the shuffle. This is true with research and development (R&D) tax incentives--so much focus is on the federal R&D tax credit that state incentives are often an afterthought for taxpayers performing R&D activities.

The federal R&D tax credit (in Sec. 41) is a 20% incremental credit on qualified R&D expenses that exceed a base amount or a 14% incremental credit under the alternative simplified credit regime. Due to the federal credit's incremental nature (where only qualified costs over a base amount are eligible for the credit), the maximum federal benefit is often 6.5% of qualified R&D expenses. In addition to the federal credit, most states offer some kind of R&D tax incentives. State R&D incentives play an important role in states' ability to compete for and attract new investments and jobs.

States Enhance R&D Incentives

Numerous states have recently enhanced R&D incentives--giving more options to taxpayers looking to invest further in R&D or even relocate some expenses to a more taxpayer-favorable jurisdiction. The following recent enhancements may mean big savings for certain taxpayers:

Minnesota: Beginning in 2010, Minnesota offers a 10% refundable credit (providing cash refunds even if no tax is owed) on the first $2 million of eligible qualified expenses and a 2.5% credit on the remaining eligible expenses (MN Stat. [section] 290.068). The credit is also available to C corporations, shareholders in an S corporation, and partners in a partnership.

California: The state continues to offer a 15% incremental credit on qualified expenses (CA Rev. & Tax. Code [section] 23609). Due to the state's suspension of the use of net operating loss (NOL) carry forwards, many California taxpayers have found increased value in the R&D credit. The credit can be used to offset up to 50% of tax liability in 2008 and 2009 and up to 100% of tax liability in 2010 and 2011 (CA Rev. & Tax. Code [section] 23036.2).

Utah: Utah phased in R&D tax credit enhancements enacted in 2008 over the past several years. The state now offers two credits--the traditional 5% incremental credit and an additional 9.2% nonincremental credit (UT Code [section] 59-7-612). Taxpayers cannot carry forward any unused nonincremental credit if it is not used in the year generated.

Connecticut: Like Utah, Connecticut has two R&D credits: an incremental 20% credit and a...