New York R&D Tax Credit: Eligibility, Benefits, and Claiming

June 26, 2024
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Research and development tax credits are a powerful tax incentive that is designed to stimulate innovation and economic growth by supporting businesses that engage in innovation and research within their respective industries.

For businesses in New York, this tax credit can significantly offload the costs associated with developing new products and technologies that give them a competitive edge in their respective markets. This article will look into the specifics of claiming the complicated New York research and development tax credit, eligibility criteria, and qualified research expenses for you to claim.

What are the New York R&D Tax Credits?

 

A person researching R&D tax credits on a laptop, with a calculator and financial documents.

The R&D credit in New York aims to encourage businesses to increase their research and development spending within the state. The primary purpose of this credit is to drive innovation and overall economic growth.

One of the top initiatives is the Excelsior Jobs Program, which provides various tax credits to businesses that contribute to New York. This program is designed to support businesses that create jobs and make substantial investments that boost New York’s economy.

Some of the benefits that a business can see from this program are increased cash flow, competitive advantages in the area, and more spending as a result of substantial economic growth. You can claim this tax credit in the state of New York for up to 10 years, which is supposed to support sustained investment in your research.

This state tax credit very closely mirrors the federal credit, but it means that the requirements are going to be much stricter than they are in other states. Making sure that you have a certified public accountant on hand will help guide you through the complicated process of claiming tax credits in New York.

Does New York have an R&D credit?

Yes! The two most popular tax credit programs for research and development are the previously mentioned Excelsior Jobs Program and the Life Sciences Research and Development tax credit.

Depending on the field that you’re interested in doing research in, these can provide significant support for qualified research expenses that you can accrue when performing experiments.

Tax credits under the Excelsior Jobs Program include the Excelsior Jobs tax credit, the Excelsior Investment tax credit, and many others that can be huge assistants to any New York business.

What is the Life Sciences R&D Tax Credit Program?

The Life Sciences Research and Development tax credit is designed to support innovation from life science companies throughout the state. In order to qualify for this credit, you must be a new business that is qualified as a life sciences company, as well as meet the other requirements to claim tax credits in the state of New York.

The credit is calculated based on the company’s qualified research expenditures, with 15% allocated for companies with 10 or more employees and 20% allocated for companies with less than 10 employees.

There is an annual cap of $500,000 per year, with a lifetime cap of $1.5 million per company. There is a $10 million dollar limit that is spread across three consecutive tax years, beginning all businesses in New York.

Eligibility Criteria for New York Businesses

 

Eligibility Criteria for tax credits

In order to qualify for tax credits in the state of New York, you must meet some basic criteria, including engaging in qualified research activities, operating and incurring research expenses within the state of New York, and meeting the specific employment and investment thresholds that are set by the programs individually.

Because the employment and investment criteria are implemented by the program rather than the state of New York, this can vary depending on which tax credit you’re applying for.

Four-Part Test for Qualifying Activities

The four-part test, derived from Section 41 of the Internal Revenue Code, is used to determine whether a business qualifies for state and federal research and development tax credits.

Technological In Nature

This requirement forced companies to rely on the principles of physical or biological sciences, engineering, or computer science in order to qualify for a research and development tax credit program. This would mean that they have to work within those fields directly rather than being used to streamline business.

An example of a qualifying activity would be the difference between testing new products and materials for emerging biotechnology. An example of what wouldn’t qualify is customer reactions to new products and services that the company produces.

Permitted Purpose

Research that is covered by the tax credit must be for a permitted purpose, which means that the research has to aim to create new and improved functionality for the development or improvement of a product or process.

It is extremely important to keep documents of the research that you do to ensure that everything you claim under this tax credit has justifications for their permitted purpose.

Eliminate Uncertainty

This criterion ensures that companies that are using the tax credit for research and development are specifically using the funds to develop or improve a product or process that can be applied to the field, rather than just the business itself.

For example, these tax credits can be used to apply new materials and improve the process of collecting samples from endangered animals, but they wouldn’t be able to be used in product launches or customer service experiences.

Experimentation

The process must involve a trial-and-error methodology, which means there has to be an element of risk with your experiment. While failure never feels good, testing out new materials carries the condition that some of these materials may not work for their intended purpose, and the same can certainly be assumed of other experiments.

Make sure to keep track of the different trial runs and methods that you’re using to create improvement in your field to prove that you’re meeting this requirement.

Calculating the New York R&D Tax Credit

 

A professional working on a laptop and using a calculator and reading the tax credit documents, surrounded by financial documents.

The New York Research and Development is calculated as 50% of the federal research tax credit related to expenses within the state. It is capped at 6% of the overall qualified research expenses, with an exemption for qualified green projects that raises the cap to 8%.

There are a few limits to this credit, notably that you may not claim contract research expenses that you can claim in other states, and you also need a certification from Empire State Development.

Selling & Carryforwarding the New York R&D Tax Credit

In New York, businesses do have the option to sell or carry forward their unused R&D tax credits, which allows business owners to have the financial flexibility to support their research goals. Eligible businesses can sell their credits, obtaining immediate capital to sustain research activities for a longer period of time.

This strategy is beneficial for businesses with fluctuating income, as they can still benefit from the credits over time. To maximize these benefits, businesses should plan their tax credit usage maintain detailed documentation, and consider working with experienced consultants such as CPAs can allow you to find what is most strategic for your company.

New York Qualifying Research Expenditures 

Qualifying expenses are the costs that are incurred by businesses in the pursuit of research and development that falls under IRC Section 41. In New York, these expenses must meet specific criteria to be eligible for tax credits under programs for the state.

Wages

One of the qualified expenditures are wages, which are paid to employees that are directly involved in qualified research activities that are eligible for the R&D credit. This includes direct research activities, supervising of research, and support activities. Importantly, contracted wages do NOT count in the state of New York as wages under this credit, specifically for qualified life sciences companies.

Supplies

Expidentures on supplies used in the process are considered qualified. These supplies must be tangible property that is used during the research process. These can include materials and components, prototypes, and equipment rentals. It doesn’t;t include materials that keep the office running, such as office supplies or administrative software.

Research

Direct research costs can come from conducting research activities. This is heavily dependent on the program that you’re applying for, but generally, they are used to offset the cost of internal research costs and testing, as well as research facilities.

These facilities and costs must be dedicated solely to research, so you cannot claim the credit against your place of business or other business expenses. A great example of this would be an automotive company deciding to maintain a specific testing facility for developing new, safer vehicle technologies.

How to Claim New York R&D Tax Credits?

 

A professional using a calculator and smartphone illustrating the process of claiming R&D tax credits.

Claiming these tax credits in New York can be a very complex process that requires planning, documentation, and a thorough understanding of state regulations.

However, with the guidance of a certified public accountant, this process can be made much more bearable, ensuring that you remain compliant and maximize your potential tax savings.

Once your application is submitted to the Empire State Development regional office, it will go through a process of approval. after this review, assuming you have gathered your documents and recorded everything correctly, you will be granted the certificate to continue claiming Tax Credits in the state of New York.

After you’re granted a certification, businesses must fulfill performance reporting requirements in the years following the initial claim. You’ll provide annual reports to the Empire State Development office detailing the continued research activities and any changes in the scope and scale of these activities.

Required documentation and attachments

When you’re ready to begin filling out the paperwork, make sure to include all necessary documentation with your certificate of credit attached. This ensures that you can proceed to fill out:

  • Form CT-648: This is a form by the Department of Taxation and Finance that allows you to calculate the estimated amount for the credit, as well as any relevant partnership information.
  • Form IT-648: Also by the Department of Taxation and Finance, this includes Schedule A to D with important information surrounding ownership and other important computation information.
  • Federal Form 6765: This is a federal form for increasing research activities, and can be used to elect and figure the payroll tax credit on the federal level.
  • Program Application: Depending on the field in which you want to claim a tax credit in, you need to fill out a separate application. The Life Sciences tax credit application is a great example of this in action.¬†

Next Steps

The research and development credit for businesses in New York offers a significant financial change, as well as providing an opportunity for innovation and competitive advantage over other business competitors.

These credits, while supportive, are also very complicated. If you’re tired of navigating the complexities of this application process, our certified public accountants are here to help with anything that you need to help you get the most out of your tax credits while staying in compliance.

Their expertise in research and development tax credits can ensure that your business meets all eligibility requirements, accurately calculates qualifying expenses, and more. Don’t let the complexity of the process keep you from saving money – contact us today for experts in taxation!

FAQs

What is the R&D exemption in NY?

Research and development tax credits in New York allow businesses to claim a tax credit against their overall liability for research expenses incurred within the state.

What is the New York City investment tax credit?

The New York City Investment Tax Credit provides tax relief to businesses that make investments in certain properties, such as buildings, machinery, and equipment, used for manufacturing, research, and development in New York. Eligible businesses can claim a percentage of the cost of these investments as a credit against their business taxes.

What is New York New Markets tax credit?

The New York Markets Tax Credit is designed to attract private investment to low-income communities by providing credits to investors who assist in Community Development Entities. These entities finance businesses and real estate projects that create jobs and stimulate economic growth in areas where opportunity may not be as prevalent. This program helps to revitalize economically distressed areas by fostering business development in areas that need it most.

Can I claim both the New York and federal R&D tax credits?

Yes! Businesses can claim both the state and federal tax credits for research and development, governed by Section 41 of the Internal Revenue Code. The state criteria closely align with federal requirements, so gathering information will be very similar for both.

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