Massachusetts R&D Tax Credits

The State of Massachusetts, under 830 CMR 63.38M, offers a refundable tax credit so long as companies meet the requirements of IRC § 41. The Economic Development Act, St. 2014, c. 287, revised the research credit provisions in G.L. c. 63, § 38M, effective for tax years beginning on or after January 1, 2015.

Starting in 2018, one of the revisions provides business corporations with the option of electing to have the research credit determined under an alternative simplified method, calculated in a manner similar to the federal credit for qualified research expenses in Internal Revenue Code § 41.

The state places a cap on credit utilization, allowing the Massachusetts R&D credit to be applicable only to the extent that a minimum tax of $456 still exists. Massachusetts allows companies to elect to use either their federal gross receipts or their Massachusetts gross receipts in calculating the credit. The election will remain for the next three years.

Additionally, the credit is limited to 100% of the first $25,000 of corporate excise liability plus 75% of the liability over $25,000. Unused credits may be carried forward even in the event of a merger.

Qualified Massachusetts Research Expenses (as defined by IRC section 41) can include any of the following expenses directly attributed to research and development activities conducted in the state:

1. Wages paid for qualified services performed in Massachusetts;
2. Amounts paid for supplies or raw materials used or consumed in Massachusetts in conducting qualified research;
3. Amounts paid for the right to use computers located in Massachusetts in the conduct of qualified research that takes place in Massachusetts, to the extent such amounts are treated as in-house research expenses;
4. Sixty-five percent (65%) of amounts paid to other persons as contract research expenses to the extent attributable to research activity conducted at a research facility located in Massachusetts.

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Learn more about Massachusetts' R&D Tax Credit law here, and here. 

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R&D Tax Credit Available:

Yes

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Eligible Entities:

C Corporations, S Corporations, Unincorporated Flow-Through Entities

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Deadline for Tax Filing:

Due with Massachusetts Tax Return on Form Schedule RC

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Data Required to Compute Credit:

Claim Period Qualified Research Expenses (QREs)

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What Information is needed?

QREs for Prior 4 Tax Years

Gross Receipts for Prior 4 Tax Years

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Credit Carryforward:

15 years

Indefinite for credits capped by the 75% Excise Tax limitation

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The R&D tax credit equals:

• Alternative Simplified Method
  For calendar years 2015, 2016, and 2017, the amount of the alternative simplified credit is equal to 5% of the taxpayer’s QREs that exceed 50% of the average QREs for the 3 taxable years preceding the credit year.
  
  For calendar years 2018, 2019, and 2020, the amount of the alternative simplified credit will be 7.5% of the taxpayer’s QREs that exceed 50% of the average QREs for the preceding 3 taxable years.
  
  For calendar years 2021 and beyond, the amount of the alternative simplified credit will be 10% of the taxpayer’s QREs that exceed 50% of the average QREs for the preceding 3 taxable years.

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• Regular Method
  The Regular credit equals the sum of the following amounts:
  
  1. 10% of the excess Massachusetts QREs for the taxable year over the Massachusetts qualified research base amount; plus
  
  2. 15% of Massachusetts basic research payments for the taxable year.

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Specific Items to Note:

• For taxable years beginning on or after January 1, 2015, taxpayers have two options to calculate the Massachusetts R&D tax credit benefit: Regular Method & Alternative Simplified Method.
• S corporations may apply the credit against their corporate excise liability under the non-income or, if applicable, the income measure of the corporate excise. The credit does not flow through to the individual shareholders of an S corporation.‍