The Revised Massachusetts Research Tax Credit Regulations – How Will the New Rules Affect Your Business?

In August of 2014, the Massachusetts legislature enthusiastically approved An Act Promoting Economic Growth in the Commonwealth, which was quickly signed into law by former Governor Duval Patrick. While there is optimism among the government faithful that the bill’s $85-million economic stimulus package will spur vitality to the Commonwealth’s economy, the state’s manufacturers and technology companies are left wondering how the new R&D tax credit regulations prescribed in the legislation will affect their upcoming state tax filings.

An inspection of the stimulus bill’s provisions relating to the research credit, which are in effect for tax year 2015, reveals that the legislation reshapes the credit in several important ways. First, the legislation significantly alters the long-standing method for computing the credit, which had been in place since 1995. A closer look at the new rules affecting the regular credit calculation method reveals that the principal alteration affects the computation of the “fixed base percentage” (FBP) and consequently the base amount unto which the credit amount is determined. For businesses in existence prior to 1984 that never claimed the credit in the past, the new rules are welcome news, while older companies that regularly claim research credits may find their tax savings significantly smaller. Clearly, the new computational rules will lessen the research credits for companies spending fewer dollars on development in recent years.

Further to rewriting the rules for computing the FBP, the new regulations eliminate the cap relating to the amount of the credit with respect to the qualifying research expenditures. Previous computational rules limited the credit to no more than 5% of the qualifying expenses, while the new regulations would permit credits of as much as 10% of a company’s QREs.

In addition to changes of the regular credit calculation, the state’s stimulus bill inaugurates an alternate method for computing the credit; a knock-off of the IRS’s “alternative simplified credit” calculation. This new optional credit computation method will certainly be of particular interest to older businesses that have not claimed the R&D credit in the past because of inadequate records concerning the 1984-1988 base years. The new simplified calculation method will also find favor with young start-up companies that are fewer than five-years-old.

An important point about the rules concerning the new simplified credit calculation method is that the computation of the credit significantly increases over the next seven years. For 2018 through 2020, the prescribed calculation increases the research credit by 50%, and for 2021 and subsequent years, the credit increases 100% in comparison to the 2015 computation rule.

So how will the new R&D tax credit regulations affect manufacturers and technology companies in the Commonwealth? The businesses that will derive the most benefit are:

  • Start-up businesses that are less than five-years-old.
  • Businesses that had qualifying research activities starting after 1983 and that had incurred better than modest increases to their development expenses in recent years.
  • Older businesses that never claimed R&D credits in the past due to lack of adequate supporting documents for the 1984-1988 time-frame.
  • Businesses claiming research credits in the past that were computed using an FBP in excess 3%.
  • Businesses having declining research expenditures in recent years.
  • Any manufacturing or technology company that has never claimed the research tax credit.

Contact us for additional information about the Massachusetts Research Tax Credit.