State Research and Development Tax Credits: Navigating Multi-State Apportionment Rules

Identifying State Deviations From Federal Treatment, Uncovering R&D Tax Benefits for Companies With Net Losses

Recording of a 110-minute CPE webinar with Q&A


Conducted on Tuesday, June 27, 2017
Recorded event now available


This webinar will provide tax advisers and compliance professionals with a thorough and practical guide to claiming research and development (R&D) income tax credits in a multi-state setting. The panel will discuss how to determine activities that may be treated as qualified research activities (QRAs), offer guidance on documenting and claiming the credit, and detail key states’ rules governing R&D credits. The event will focus on small to mid-size companies and will give practical tools to assist tax professionals in claiming these valuable and often overlooked tax credits.

Description

For many small and medium sized businesses, R&D tax credits are one of the most underutilized of all tax benefits. This is particularly true for companies operating in multiple states. Tax advisers face challenges in navigating various states’ rules on qualified research expenditures, determining when state rules deviate from federal R&D tax credit treatment, and identifying sourcing rules when claiming tax benefits for R&D expenditures.

The majority of states offer tax incentives for R&D expenditures. While most states conform to federal practice in determining what activities qualify for R&D benefits and calculation of qualified research expenditures (QREs) eligible for credit, there are some significant differences. Advisers can avoid state tax by structuring research activities to occur in jurisdictions with the most favorable R&D tax benefit regime.

Beginning with the 2016 tax year, Congress made two massive changes to expand the federal benefits of R&D credits. Startup companies, defined as firms with less than $5M in annual gross receipts and no gross receipts for more than five tax years may utilize the federal credit against payroll tax liability as opposed to income tax liability. Eligible companies may also apply R&D credits to offset AMT liabilities. These initiatives make claiming the R&D credit even more attractive, and make a thorough grasp of the rules for documenting R&D activities even more critical for tax advisers.

States have slightly different methodologies for calculating credit amounts and varying approaches to providing tax benefits to startups or companies with net operating losses. So, companies operating in multiple states often miss out on this crucial tax benefit. R&D activities in a state may create or affect income apportioned to the state, such as payroll or property increasing income apportioned to a three-factor state where R&D activities occur.

Listen as our experienced panel provides a thorough and practical review of calculating, claiming and substantiating a Section 41 R&D credit.

Outline

  1. States offering R&D tax credits and incentives
  2. Variances from federal rules in calculating of QREs for purposes of calculating tax credits
  3. Sourcing rules
  4. States’ approaches to calculating inclusion ratios and apportionment
  5. Documentation requirements

Benefits

The panel will discuss these and other important topics:

  • States that offer tax incentives for R&D activities
  • States’ approaches for providing R&D tax incentives for startup enterprises and companies with net operating losses
  • States’ variances from federal rules in calculating QREs
  • Various state rules for calculating inclusion ratios and apportionment factors for R&D credits

Learning Objectives

After completing this course, you will be able to:

  • Ascertain states that offer tax incentives for costs attributable to research and development activities
  • Identify differences in various states’ methods for determining QRAs eligible for R&D tax credits
  • Determine states’ rules for calculating QREs for inclusion in tax credit computation
  • Recognize R&D tax incentives states offer to startup entities and companies with net operating losses other than carry-forwards

Faculty

Joe Stoddard, CPA, Partner
Eide Bailly, Salt Lake City

Mr. Stoddard provides tax consulting services to industries including manufacturing, technology, construction, life sciences and government contractors. He helps clients benefit from research and development tax incentives, including federal and state credits and cost segregation studies, and he regularly works with the IRS and state taxing authorities to support research and development tax incentives claims. He has written numerous articles on research and development tax incentives issues and frequently presents at conferences and seminars.

Daniel F. Laughlin, Senior Manager
FGMK, Chicago

Mr. Laughlin is responsible for tax incentive engagements, including the R&D Tax Credit, Work Opportunity Tax Credit, Domestic Production Activities Deduction. He works with clients of various sizes and entity structures across several industries, including advanced manufacturing, financial services, insurance, and software. He has extensive experience working with clients to identify projects and related expenditures that qualify for tax credits and deductions. He structures engagements to maximize tax benefits while minimizing any imposition on client operations. Previously, he was a Director at a Los Angeles-based firm where he focused on R&D, WOTC, and other federal tax incentives. Before that, he was a Senior Manager in the R&D and Government Incentives practice at a Big Four firm in Chicago.

Stacey L. Roberts, CPA, State and Local Tax Senior Manager
Eide Bailly, Denver

Ms. Roberts has years of public accounting experience and an expertise in state and local taxation. She serves clients in a variety of different industries, including manufacturing, real estate, transportation, financial, food service, software, nonprofit and professional services. She is highly experienced with a variety of different entities, including C corporations, S corporations, LLCs and partnerships and specializes in state and local tax services.


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State Income Tax Advisory Board

David Adler

Director of Multistate Tax Services

Deloitte Tax

Elizabeth Bowman

Tax Research Analyst

ADP Tax Credit Services

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Partner

Williams Mullen

Don Griswold

Executive Tax Counsel

Berkshire Hathaway Tax Group

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Partner

Faegre Baker Daniels

Richard Pomp

Professor of Tax Law

University of Connecticut

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President

Scout Economics

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taxadvantagegroup

Richard Weiss

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