Vermont R&D Tax Credits

State and Federal Credits Available

27 percent credit

Prorated share of federal credit

10 year carry forward

Applies to future income tax

Nonrefundable

Income tax only

In-state QREs

Vermont research required

The Vermont Research and Development Tax Credit, authorized under 32 V.S.A. § 5930ii and administered by the Vermont Department of Taxes, provides businesses with a nonrefundable incentive equal to 27% of the federal R&D credit attributable to qualified research expenditures (QREs) conducted within the state. This credit supports innovation by offsetting Vermont personal income, business, or corporate income tax liabilities and applies only to in-state activities aligned with IRC § 41 standards.

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27 percent credit

Prorated share of federal credit

10 year carryforward

Applies to future income tax

Nonrefundable

Income tax only

In-state QREs

Vermont research required

Key Highlights

27% of the federal credit amount calculated for Vermont QREs, one of the highest prorated rates in the U.S.
Nonrefundable but carries forward for up to 10 years
Prorated based on the ratio of Vermont QREs to total QREs if multi-state operations
Requires claiming the federal R&D credit under IRC § 41 for the same tax year
Transparency requirement: Department publishes annual list of claimants

Who Qualifies

Credits are available to taxpayers with Vermont income tax liability who perform qualified research activities in the state, mirroring federal IRC § 41 definitions. Eligibility focuses on the location and nature of expenditures, with proration for in-state portions.

Eligible Entities

C Corporation May claim both the regular and basic research credit
S Corporation Limited entity-level use; can pass credits to shareholders
Partnerships / LLCs Credits pass through to owners via Schedule K-1

Qualified Research Expenses (QREs)

How to Calculate the Vermont R&D Tax Credit

Vermont uses a prorated method tied directly to the federal credit, simplifying calculations for businesses already compliant with IRC § 41. No separate base amount is computed at the state level. Instead, the credit is 27% of the hypothetical federal credit based on Vermont-sourced QREs.

Regular Prorated Method

Determine total qualified research expenses (QREs) for the tax year under federal rules.
Apportion QREs to Vermont based on the ratio of in-state activities (e.g., wages paid to Vermont employees, supplies used in Vermont).
Compute the hypothetical federal credit using only the Vermont-apportioned QREs (apply federal regular or ASC method, including any fixed-base percentage or 50% of prior-year average).
Apply the 27% state rate to this federal credit amount.

Example Calculation

Assume a business has $2,000,000 in total QREs nationwide, with $500,000 (25%) attributable to Vermont. Using the federal regular method:

Hypothetical federal credit on Vermont QREs = 20% incremental rate × $100,000 excess over base =$20,000

Vermont credit = 27% × $20,000 =$5,400

If all QREs are in Vermont and the full federal credit is $100,000:

Vermont credit = 27% × $100,000 =$27,000

How Federal Base Rules Apply When Recomputing on Vermont-Only QREs

These are federal section 41 rules applied to Vermont-sourced data only, as required for the hypothetical federal computation on BA-404 when there are multi-state expenditures. Vermont does not create its own separate base rules.

Identify Vermont-sourced QREs and gross receipts for the prior 4 tax years to establish the fixed-base percentage under federal rules.
Compute fixed-base % = (sum of prior QREs / sum of prior gross receipts) over the 4 years.
Apply base amount = fixed-base % × average Vermont gross receipts for prior 4 years (minimum 50% of current-year Vermont QREs).
Ensure Vermont-specific only; exclude non-Vermont expenses or receipts. If no prior data (e.g., startups), use federal startup rules: 3% fixed-base for first 5 years, phasing to 16% by year 10.

Example Calculation

Prior 4-year QREs total =$4M

prior gross receipts total =$20M

→ Fixed-base % = $4M / $20M =20%

Average VT GR prior 4 yrs =$5M

Current VT QREs =$1M

→ Base = 20% × $5M =$1M (but min 50% of $1M = $500K, so use $500K)

If no prior: → Base =50% of current VT QREs (full excess qualifies after proration).

Gross Receipts and Apportionment Rules

Use Vermont-sourced gross receipts only for any federal base calculations in the proration step.
Exclude non-Vermont sales, services, royalties, or returns/allowances.
Startups follow federal fixed-base rules (3% for first 5 years, phasing to 16% by year 10), but applied only to Vermont data.
No Vermont gross receipts? The base defaults to 50% of current-year Vermont QREs, per federal alignment.

Estimate Your Credits

Vermont-Specific Rules

Vermont's R&D credit emphasizes simplicity through federal alignment while incorporating state-specific safeguards like transparency to ensure accountability.

High Prorated Rate

At 27%, Vermont's share of the federal credit ranks among the top in the U.S., driving high utilization in tech and manufacturing sectors, with several million dollars of credits claimed each year.

10-Year Carryforward

Unused credits carry forward for up to 10 years, providing long-term value without expiration pressure.

Transparency List

The Department of Taxes publishes an annual report of all claimants, promoting public oversight; accurate documentation is essential to avoid compliance issues.

Other Unique Rules

Pass-Through Treatment Credits flow directly to owners via K-1 for S-Corps, partnerships, and LLCs; for unitary corporate groups, use Vermont’s general corporate income tax and apportionment rules to determine which members claim and use the credit.
In-State Only Strictly limited to QREs conducted in Vermont. No credit for out-of-state activities, even if benefiting Vermont operations.
Audit Guidelines Retain R&D documentation for at least as long as federal rules require, typically 3 to 7 years, and long enough to cover the 10-year carryforward window; aligns with federal documentation standards under IRC § 41, with state audits focusing on proration accuracy.

High Prorated Rate

At 27%, Vermont's share of the federal credit ranks among the top in the U.S., driving high utilization in tech and manufacturing sectors, with several million dollars of credits claimed each year.

10-Year Carryforward

Unused credits carry forward for up to 10 years, providing long-term value without expiration pressure.

Transparency List

The Department of Taxes publishes an annual report of all claimants, promoting public oversight; accurate documentation is essential to avoid compliance issues.

Other Unique Rules

Pass-Through Treatment Credits flow directly to owners via K-1 for S-Corps, partnerships, and LLCs; for unitary corporate groups, use Vermont’s general corporate income tax and apportionment rules to determine which members claim and use the credit.
In-State Only Strictly limited to QREs conducted in Vermont. No credit for out-of-state activities, even if benefiting Vermont operations.
Audit Guidelines Retain R&D documentation for at least as long as federal rules require, typically 3 to 7 years, and long enough to cover the 10-year carryforward window; aligns with federal documentation standards under IRC § 41, with state audits focusing on proration accuracy.

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Vermont R&D Tax Credits Case Study

A Vermont-based software firm unlocked significant savings through precise proration of multi-state QREs.

$27,000

total state R&D tax credits earned

50%

of wages qualified for credits

$135,000

total R&D tax credits earned (federal + state combined)

Frequent Asked Questions

What is the Vermont R&D tax credit?

Vermont offers a nonrefundable credit equal to 27% of the federal R&D credit for qualified expenditures under IRC § 41 conducted in the state, administered by the Department of Taxes to encourage local innovation.

What activities qualify for Vermont’s R&D tax credit?

Eligible activities mirror federal standards, such as developing new software prototypes or improving manufacturing processes in Vermont. Strike Tax reviews projects for compliance.

How much can my business save with Vermont’s R&D tax credit?

For a $100,000 federal credit fully attributable to Vermont, you could claim $27,000 in state credits. Stack with federal for amplified savings. Use Strike Tax’s R&D Credit Calculator for personalized estimates.

Are Vermont R&D tax credits refundable or carryforward?

Credits are nonrefundable but carry forward for 10 years against future income tax. The state publishes annual claimant lists for transparency. Strike Tax helps maximize utilization.

How do I apply for Vermont’s R&D tax credit?

File Schedule BA-404 with your Vermont return (for example, IN-111 for individuals, BI-471 for pass-through businesses, or CO-411 for corporations) and include a copy of federal Form 6765. Strike Tax handles documentation and proration.

Can Vermont businesses claim both state and federal R&D credits?

Yes, the Vermont credit stacks on top of the federal section 41 credit for the same QREs, subject to general federal and state limitations. Strike Tax optimizes claims across both levels.

How is the Vermont R&D credit prorated for multi-state businesses?

Apportion based on the ratio of Vermont QREs to total QREs, then apply 27% to the resulting federal credit portion. Strike Tax ensures accurate allocation.

What documentation is required for Vermont R&D claims?

Align with federal records: project descriptions, wage logs, and invoices for QREs. Retain for at least as long as federal rules require, typically 3 to 7 years. Strike Tax prepares audit-ready files.

Does Vermont’s transparency policy impact R&D claims?

Yes, the Department publishes claimant names and credit amounts annually. This requires precise reporting to avoid discrepancies. Strike Tax maintains compliant records.

Why choose Strike Tax for Vermont R&D credits?

Strike Tax specializes in federal-state stacking, handles proration complexities, and ensures transparency compliance, helping Vermont businesses capture every eligible dollar.

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