Maryland R&D Tax Credit | Reduce your Tax Liability

What are the state regulations regarding Maryland’s Research and Development Tax Credit, and how can businesses maximize it? We’ll discuss pertinent details companies should know about eligibility and how to claim and calculate this tax credit. This will give Maryland companies an idea of what they should do to comply with the state’s rules on this tax claim.

What are Maryland R&D Tax Credits?

A business entity with qualified research expenses in Maryland may apply for two separate income tax credits, the Basic R&D Tax Credit and the Growth R&D Tax Credit. This tax credit is equivalent to ten percent of eligible R&D expenses incurred over the Maryland Base Amount during the taxable year.

If the total credits applied exceed the statutory caps, the business’s R&D tax credit is prorated. It’s $3.5 million for small businesses, while the statutory cap is $12 million. A single entity may not receive a credit exceeding $250,000. The state follows the federal definition of R&D and QREs, as stated in § 41(b) of the Internal Revenue Code in Maryland.

Types of Maryland R&D Tax Credits

In Maryland, there are two types of R&D tax credits: the Basic R&D Tax Credit and the Growth Tax Credit. The former is equivalent to three percent of QREs that don’t exceed the Maryland Base Amount. This credit is prorated if the total exceeds $5.5 million.

Meanwhile, the Growth Tax Credit is granted to 10% of the amount by which qualified expenses are paid or incurred by the entity during the tax year exceed the base amount for the taxpayer. The credit is prorated if the total credits exceed $6.5 million.

Does Maryland have an R&D credit?

Yes, Maryland has two types of R&D tax credits: basic and growth tax credits.

Eligibility Criteria for Maryland Businesses

In general, taxpayers are eligible for the R&D Tax Credit if they have QREs as defined by IRC §41 in Maryland during the tax period. Taxpayers can claim the credit as a tax offset. The credit is nonrefundable, but small businesses may be permitted a credit refund. Maryland returns can only be changed for current-year credits, as the credit applications are due annually.

This tax credit is available to C-Corporations, S-Corporations, LLCs, and partnerships, provided that their R&D activities take place in Maryland. The Maryland Department of Commerce follows the federal definition of qualified expenses.

Four-Part Test for Qualifying Activities

Before a company declares an activity for its Maryland income tax return, it should determine if its activity can be included in its tax credit certificate. This four-part test can help businesses decide which activities count for R&D tax credits.

Technological in Nature

The activity should rely on physical, computer, engineering, or biological science, engineering, or scientific methods to qualify. This entails engineering in a science field or technology use.

Its goal is to improve or develop a software, product, or process’s performance or functionality.

Permitted Purposes

The activity must involve an improved or new performance, reliability, function, composition, or quality. It should aim to develop or improve software, processes, or products. Moreover, the research shouldn’t be conducted for non-commercial purposes, like art-related or social sciences.

The activity must relate to a new or improved business component’s function, performance, reliability, quality, or composition. It should intend to develop a new or improved product, process, or software. Moreover, it ensures that the research is not conducted for non-commercial purposes, such as social science or arts-related endeavors.

Elimination of Uncertainty

The activity must aim to discover information to remove uncertainty about a particular method or capability for developing or improving a process or product. There is uncertainty if the software, process, or product’s design, procedure, or capability is unknown.

Process of Experimentation

The activity must involve experimentation, which means evaluation or alternatives, simulation, trial and error, testing and modeling, and the like. It should involve a systematic process to evaluate at least one alternative and include testing hypotheses, prototyping, modeling, and iterative analysis.

Carrying Forward & Refunding the Maryland R&D Tax Credit

Small businesses can refund tax credits if certified after December 15, 2012, to the extent they exceed the income tax liability. If the credits exceed the income tax for that year, they may be carried forward for the next seven years.

Maryland Qualifying Research Expenditures

Not all expenses incurred can be declared for one’s income tax liability. Companies should note the only qualified research expenses for the Maryland Research and Development tax credit program. The R&D tax credit covers two categories of qualified research expenses: in-house and contract. In-house research expenses include salaries paid to employees for any qualifying activities performed, supplies bought to conduct qualified research, and contract research expenses for qualified research.

Only wages can be declared qualified research expenses, and only employees directly involved in the activities count. Any tangible property purchased for the qualified research is a supply. Contract research expenses occur when a third-party business performs qualified research on behalf of the taxpayer.

How to Claim Maryland R&D Tax Credits

Applicants are required to apply using an online system. The amount of R&D credits available in the state is capped yearly, and the Maryland Department of Commerce will prorate the credits in case:

• the total amount of Basic Credits applied for exceeds $5.5 million or
• the total amount of Growth Credits applied exceeds $6.5 million.

Each entity will get an R&D credit Certification Letter with the approved credit amount by February 15 of the following year.

Calculating the Maryland R&D Tax Credits

To calculate one’s tax credits in Maryland, a company must follow these steps:

1. Determine the business’s Maryland gross receipts for the year they claim the credit and the four previous years or those years with gross receipts.
2. Compute the average gross receipts based on how long the business has existed. The average is multiplied by the year potion for which the company claims the credit if it’s a partial or short-year taxpayer.
3. Identify the business’s qualified research expenses for the tax year and the preceding four years.
4. Compute the expense average for these years based on how long the business has existed. The average is multiplied by the year potion for which the company claims the credit if it’s a partial or short-year taxpayer.
5. Calculate the base percentage by dividing the average expenses by the average gross receipts for the applicable years.
6. Calculate the base amount by multiplying the base percentage by the gross receipts. Determine the adjusted base amount by multiplying the base percentage by the adjusted average gross receipts if it’s a partial or short-year taxpayer.
7. Determine the tax credit by subtracting the base amount from the qualified research expenses and taking 10% of this amount.

There are two credits available:

1. Basic R&D Credit: the basic credit is calculated as 3% of QREs that do not exceed the base amount and
2. Growth R&D Credit: The growth credit is calculated as 10% of QREs, more than the base amount.

The base amount is determined by dividing the aggregate QREs by the aggregate MD gross receipts for the four years before the credit year.

Maximizing the Benefits of the Maryland R&D Tax Credit

Companies that intend to make the most of this tax credit should take note of the following:

1. Identify all qualifying research activities and expenses: Companies should determine which activities count as research and development expenses.
2. Maintain documentation: Submitting official documents and records is vital to support one’s claim.
3. Integrate the credit into long-term R&D planning for Maryland operations: The R&D tax credit is a tax benefit companies can claim for years, and they should consider it when preparing their income tax returns.
4. Reinvest tax savings into further R&D efforts: Companies should use the funds obtained from this tax credit for R&D activities to increase their future tax claims.
5. The treatment of R&D tax credits when purchasing a firm that has claimed them should be considered when preparing for tax claims.

Next Steps

Companies intending to maximize the R&D tax credit should seek the assistance of professionals well-versed in the Maryland Department of Commerce. These experts can help companies navigate the state’s rules and regulations and maximize their tax credits in the long term. Contact us and get in touch with the relevant professionals today!

FAQs

What is the basic R&D tax credit in Maryland?

The Basic R&D Tax Credit equals three percent of QREs that do not exceed the Maryland Base Amount. The basic tax credit is prorated if the total credits applied for exceed $5.5 million.

What is the Maryland Innovation tax credit?

This program provides qualified investors a refundable income tax credit in a Qualified Maryland Technology Company (QMTC).

What qualifies for the R&D tax credit?

Companies that pass the four-part test can claim the R&D tax credit for their activities.

How many states have R&D tax credits?

R&D tax credit is a federal benefit, so it’s available in all states. However, some states offer additional incentives.