Pennsylvania R&D Tax Credits

State and Federal Credits Available

10%

Rate on excess QREs for large businesses

20%

Rate for qualified small businesses (assets $5M)

15 yrs

Carryforward period

$60M

Annual statewide cap ($12M for small biz)

Dec 1

Application deadline via myPATH

The Pennsylvania Research and Development (R&D) Tax Credit, governed by Article XVII-B of the Tax Reform Code of 1971 and administered by the Pennsylvania Department of Revenue, incentivizes qualified research activities conducted within the Commonwealth. This nonrefundable credit offsets Corporate Net Income Tax (CNIT), Personal Income Tax (PIT), or other applicable liabilities, with a total annual cap of $60 million ($12 million reserved for qualified small businesses).

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10%

Rate on excess QREs for large businesses

20%

Rate for qualified small businesses (assets $5M)

15 yrs

Carryforward period

$60M

Annual statewide cap ($12M for small biz)

Dec 1

Application deadline via myPATH

Key Highlights

10% credit on Pennsylvania-sourced QREs exceeding the base amount; 20% for qualified small businesses with net book value of assets under $5 million
Base amount is the greater of 50% of current-year QREs or the average of prior four years' QREs (ASC-equivalent method)
Credits carry forward for 15 years with no carryback
Unused credits may be sold or assigned to third parties, providing immediate cash flow (purchasers limited to 75% of liability)
$60 million annual cap prorated among applicants; $12 million set-aside for small businesses
Applies to research performed exclusively in Pennsylvania; requires submission of a completed federal Form 6765 or equivalent schedule supporting PA QRE calculations

Who Qualifies for the Pennsylvania R&D Tax Credit

Eligibility centers on conducting qualified research activities (QRAs) in Pennsylvania that align with federal IRC § 41 standards, adapted for state purposes. Businesses must demonstrate at least two years of prior R&D expenditures and maintain full compliance with Pennsylvania tax laws. A completed federal Form 6765 or equivalent schedule supporting the QRE calculation is required with the state application (federal credit claim not mandatory).

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 Pennsylvania R&D Tax Credit

Pennsylvania employs a single calculation method resembling the federal Alternative Simplified Credit (ASC), using only Pennsylvania-sourced QREs. The credit rewards increases in research spending over a simplified base, making it accessible for businesses with fluctuating expenditures. Qualified small businesses (net book value of assets < $5 million, verified by balance sheet) receive double the rate.

Regular (ASC-Equivalent) Method

Determine total Pennsylvania QREs for the current tax year.
Calculate the base amount: the greater of (a) 50% of current-year PA QREs or (b) the average PA QREs from the prior four tax years (use zero if no prior data).
Compute excess QREs: current PA QREs minus the base amount.
Apply the credit rate: 10% for large businesses or 20% for qualified small businesses on the excess.
Submit federal Form 6765 or equivalent and apply via myPATH for approval.

Example Calculation

Prior Year -1 QREs =$1.4M;

Year -2 =$1.2M;

Year -3 =$1.0M;

Year -4 =$0.8M;

→ Average = ($1.4M + $1.2M + $1.0M + $0.8M) / 4 =$1.1M

50% of current $2M QREs =$1M

→ Base = greater of $1M or $1.1M =$1.1M

→ Average = $0; Base = greater of 50% current or $0 = 50% of current QREs (favoring partial credit for true startups)

Base Calculation for Pennsylvania R&D Tax Credit

Identify Pennsylvania-sourced QREs for the prior four tax years (use $0 if no prior QREs or fewer than four years).
Compute average = sum of prior four years' PA QREs / 4.
Compute excess QREs: current PA QREs minus the base amount.
Determine base = greater of (a) 50% of current-year PA QREs or (b) the four-year average.
Ensure only in-state QREs; exclude any out-of-state expenses.

Example Calculation

Assume a qualified small business with $2 million in current PA QREs and an average of $1.2 million in PA QREs over the prior four years.

Base = greater of (50% × $2M = $1M) or ($1.2M avg) =$1.2M

Excess = $2M - $1.2M =$800K

Credit = 20% × $800K = $160,000

For a large business in the same scenario: Credit = 10% × $800K =$80,000

Estimate Your Credits

Pennsylvania-Specific Rules

Pennsylvania's R&D credit features unique provisions for liquidity, small business support, and compliance, distinguishing it from federal and other state programs. These rules enhance accessibility for innovators while ensuring fiscal controls.

Sellable/Transferable Credits

Unused credits awarded in 2003 or later may be sold or assigned on the open market, providing cash for reinvestment. Sales processed by June 1 following the award year; brokers must register with the Department. In 2024, over $167 million in credits were sold historically, retaining 92.9% of value. Purchasers offset up to 75% of tax liability in the purchase year (no carryforward, resale, or refund for buyers). High demand in tech and manufacturing sectors.

Small Business Double Rate

Qualified small businesses (for-profit entities with net book value of assets $5 million at year-start or -end) receive a 20% rate on excess QREs, doubling the standard 10%. Requires balance sheet submission. In 2024 awards, small businesses received 100% of their $7.2 million tentative requests (under the $12 million set-aside), benefiting 198 applicants.

Long Carryforward Period

Credits carry forward up to 15 succeeding taxable years, with no carryback allowed. This extended horizon supports sustained R&D investment, especially valuable amid the $60 million cap. Utilization data shows 84.9% of awards applied through 2022, primarily against CNIT (68.1%).

Other important rules

Annual Cap and Proration: $60 million total ($12 million small business set-aside); all timely filed applications are reviewed simultaneously, and awards are prorated if oversubscribed (e.g., 41.1% for non-small in 2024).
Application Deadline: December 1 for expenses from the prior tax year (e.g., Dec 1, 2024, for 2024 year). Department approves by May 1 of the following year.
Compliance and Appeals:Full tax compliance required (including 20%+ owners); Act 25 of 2021 added appeals process. Federal Form 6765 or equivalent mandatory; potential CPA audits for substantiation.
No Sunset Provision:Permanent since Act 85 of 2016; cap fixed through June 30, 2025, per Act 53 of 2022.
Audit Retention:Maintain records for 5 years post-application.

Sellable/Transferable Credits

Small Business Double Rate

Long Carryforward Period

Other important rules

Annual Cap and Proration: $60 million total ($12 million small business set-aside); all timely filed applications are reviewed simultaneously, and awards are prorated if oversubscribed (e.g., 41.1% for non-small in 2024).
Application Deadline: December 1 for expenses from the prior tax year (e.g., Dec 1, 2024, for 2024 year). Department approves by May 1 of the following year.
Compliance and Appeals:Full tax compliance required (including 20%+ owners); Act 25 of 2021 added appeals process. Federal Form 6765 or equivalent mandatory; potential CPA audits for substantiation.
No Sunset Provision:Permanent since Act 85 of 2016; cap fixed through June 30, 2025, per Act 53 of 2022.
Audit Retention:Maintain records for 5 years post-application.

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Pennsylvania R&D Tax Credits Case Study

Real results from a Pennsylvania manufacturing firm leveraging the small business rate and credit sale.

$160,000

total state R&D tax credits earned

40%

of wages qualified for credits

$450,000

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

‍

The firm sold $50,000 in unused credits for immediate cash, funding prototype development.

Frequent Asked Questions

What is the Pennsylvania R&D tax credit?

The Pennsylvania R&D Tax Credit provides 10% (or 20% for small businesses) of excess qualified research expenses over a base amount, capped at $60 million annually. It aligns with federal IRC § 41 but applies only to in-state activities, per Article XVII-B of the Tax Reform Code.

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

Qualified activities include developing new or improved products, processes, software, or techniques in Pennsylvania that involve technological uncertainty. Examples: prototyping in manufacturing or algorithm optimization in tech. Strike Tax reviews projects for IRC § 41 compliance.

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

A small business with $2 million in excess PA QREs could claim $400,000 (20% rate), stackable with federal credits. Large firms save at 10%. Use Strike Tax’s R&D Credit Calculator for a personalized estimate.

Are Pennsylvania R&D tax credits refundable for small businesses?

No, credits are nonrefundable but carry forward 15 years or can be sold for cash. Small businesses benefit from the 20% rate and $12 million cap set-aside. Strike Tax assists with sales to maximize liquidity.

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

Submit via myPATH by December 1, including as-filed federal Form 6765 or equivalent supporting QREs. Approval by May 1. Strike Tax handles documentation and compliance for seamless filing.

Can Pennsylvania businesses claim both state and federal credits?

Yes, the state credit uses the same QREs as federal without reduction, allowing full stacking. Pennsylvania requires federal Form 6765 or equivalent submission. Strike Tax optimizes dual claims for maximum savings.

What qualifies as a small business for Pennsylvania’s 20% R&D rate?

For-profit entities with net book value of assets under $5 million (per balance sheet at year-start or -end). Submit proof with application. This doubles the rate, prioritizing startups and growth firms.

Why can Pennsylvania R&D credits be sold, and how does it work?

Unused credits are transferable to offset up to 75% of a buyer's liability, providing cash (92.9% retention value historically). Sales process via Department by June 1 post-award. Ideal for cash-strapped innovators; Strike Tax connects to buyers.

What are the 2025 changes to R&D tax credits in Pennsylvania?

No major legislative changes; cap remains $60 million through June 30, 2025. Enhanced myPATH validation and CPA audit options ensure accuracy. Federal alignment strengthens with 2025 Form 6765 updates.

How does Strike Tax help Pennsylvania businesses?

Strike Tax identifies QREs, prepares applications, ensures compliance, and facilitates credit sales. We maximize state-federal stacking and audit defense for Pennsylvania innovators.

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