MARYLAND R&D TAX CREDITS
Businesses conducting qualified research activities in the state of Maryland qualify for two types of a research tax credit. The Basic R&D tax credit and Growth R&D tax credit. Initially, the credit was supposed to remain effective until January 1, 2020. And awaited extension by the General Assembly, which happened in 2021.
Maryland R&D Tax Credits: A Summary
The Maryland R&D tax credit consists of two schemes for large and small companies. A summary of them is listed below.
Maryland's Basic R&D tax credit accommodates 3% of the QREs not exceeding the Maryland Base Amount. While the Growth R&D allowed 10% of the QREs along with the Maryland Base Amount.
Dividing the aggregate QREs by the Maryland gross receipts (of the previous four years) results in the computation of the Base Amount.
However, if the credit of the company exceeds $4.5 million, then its credit prorates. Since Maryland follows Section 41 of the IRC, therefore the companies are required to submit their applications until 15 November of the year (in which the expenses are incurred). For small businesses, the R&D credits are refundable if their certification date is after December 15, 2012, and they exceed the tax liabilities for the specific tax year.
These terms were effective until 2022 and required further extension from the General Assembly.
Maryland R&D Tax Credit and the Senate Bill
Larry Hogan, the Governor of Maryland, signed a Senate Bill on April 13, 2021, which extended the effectiveness of the credit up to 2025. Although the original Maryland R&D tax credit started in 2000, its structure left merely dimes to many qualifying taxpayers.
The legislation signed by the Governor solely focused on increasing the refunds issued to small businesses and large organizations. According to the observation made by the Maryland Department of Legislative Services, about one-third of qualifying entities were small businesses. But unfortunately, these companies could avail only 2% of the total certified taxes.
DLS found that the Basic R&D structure didn't require expansion in research activities hence creating a windfall for the insufficient research activities as well. Additionally, some large companies also received disproportionate amounts of credit. To solve the above-stated issues, the Senate Bill made the following changes.
Complete elimination of Maryland's Basic R&D credit plan.
The total funding of the Growth R&D plan increased to 12 million dollars. This sum was approximately equal to 10% of the number of research expenses incurred, surpassing Maryland's base amount.
The total funding of the Growth R&D plan increased to 12 million dollars. This sum was approximately equal to 10% of the number of research expenses incurred, surpassing Maryland's base amount.
Note:
A business with net book value assets summing up less than 5 million dollars is a 'small company.'
Lastly, the maximum credit amount spared for a single taxpayer was limited to only $250,000.
Benefits of the New Changes
These changes helped the startup companies struggling to gain enough capital to claim the credit and aided small companies within Maryland's state. Moreover, the DLS found that the latest changes led to an increase of 7% of the research activities in the state.
The new changes in the structure and the elimination of the basic R&D credit answer the past prorations. And, the fixed credit proportion will prevent the uneven distribution of credit among the companies.
Guidelines for Online Application
The R&D credit for Maryland provides the facility of filing an electronic claim. However, the following terms are important during the submission process.
Firstly, all the fields marked with (*) are mandatory. The applications with missing mandatory fields will not submit.
A company can only file one application per a certain tax period.
Leaving the web page without submitting the application results in a loss of information
An email confirmation is sent for successful applications. The absence of the confirmation mail means unsuccessful submission.
Lastly, the applicant must correct any errors before final submission to avoid iterating the process.
The application requires the organization's legal name, the address of the organization, the Federal Employee ID number, and the Unemployment Insurance Number. Note that the application will not be submitted without completing those as mentioned above.The Maryland R&D tax credit also allows the physical filing of a claim. The companies may choose any option fitted to their needs.
Calculating Maryland R&D Tax Credit
For calculating the Maryland R&D tax credit, you can follow the below steps. however, these are only an overview. in case of doubts, professional aid is recommended.
Collect Maryland's gross receipts for the concerned tax year and the gross receipts for the previous four years. However, for new businesses, the receipts of existing years will work.
Next, evaluate the average of the company's gross receipts (as long as it has been doing research). In the case of a partial-year taxpaying organization, multiply the average by a specific portion.
For calculating the base percentage of the applicable years, divide the average Maryland qualified research expenses by the average gross receipts.
Multiply the above-computed base percentage by average Maryland gross receipts to calculate the Maryland base amount. However, for computing the base amount for the partial taxpayer, multiply the base percentage by the adjusted average of gross receipts.
Evaluate the Basic R&D credit by taking 3% of the Maryland qualified research expenses and Maryland base amount for the year in which the credit is to be claimed.
For Growth R&D credit, subtract the Maryland base amount from the qualified research expenses and take 10% of the computed value.
FAQS on Maryland R&D Tax Credit
A start-up business is required to meet the following conditions to be eligible to apply:
How can one avail of the credit if the company hasn’t invested in R&D Maryland before?
If a company hasn't invested in R&D credit before and the year of incurred R&D expenses and claiming is the same. Then, the Maryland base amount would be zero. In such a case, the company qualifies for the Growth R&D credit, which refunds 10% of the incurred expenses.
What are netbook value assets?
The netbook value assets include the company's total value assets, including tangibilities without amortization and depreciation. Netbook value assets also do not include any liabilities either.
How much credit does a qualifying company receive?
Companies receive 10 % of the incurred expenses in the taxable year exceeding Maryland's base amount.
How does one know if the company will get a refund from the credit?
Firstly, the company has to file a claim application before 15 November following the taxable year. Receiving the certification by the Maryland Department of Commerce by 15 February of the next year marks the company eligible.
Next, the company must evaluate its research activities according to Section 41 of the Internal Revenue Code. As the Maryland R&D tax credit will only refund the eligible research expenses.