Check’s in the mail
Virginia joins a handful of states to offer tax rebates for tech-based R&D
- September 1, 2011
Virginia’s high-tech companies no longer are among the have-nots. This year state lawmakers created a refundable income tax credit designed to help startup companies defray the costs of research and development.
Before the move, Virginia was one of 12 states that did not offer a tax credit for R&D expenses. That had put Virginia at a disadvantage — especially since competing neighbors Maryland, North Carolina, Pennsylvania and West Virginia offered similar breaks, say state economic leaders.
The initial investment is capped at $5 million. Despite the modest sum, business leaders say it marks an important step in helping Virginia compete in an increasingly innovation-driven economy. “Technology companies create high-paying jobs, and we want to make sure those jobs are created here,” says Mark A. Herzog, executive director of the Virginia Biotechnology Association.
The new law also shifts Virginia into another, albeit more desirable, minority: one of only seven states to offer a tax credit in the form of a cash refund.
As a result, Virginia companies that perform “qualified research and development” could be eligible to claim a tax credit equal to 15 percent of the first $167,000 of research expenses they incur during the taxable year. If the company has yet to turn a profit, it could receive a state refund check for the equivalent amount, worth up to $25,000.
Also, companies pursuing research in tandem with a state college or university can claim up to 20 percent on the first $175,000 of R&D expenses, or a refund check worth as much as $35,000. The slightly higher amounts reflect a push to promote greater collaboration between academic and private-sector researchers, state officials say.
“The refundable aspect is what makes it special,” Herzog says. “Without that element, the credit has zero value to the vast majority of Virginia’s advanced technology companies.”
In dollar terms, the total amount of tax credits available to qualified businesses in Virginia is capped at $5 million for each fiscal year from 2012 through 2016. The money will come from the state’s general fund.
Technology-based companies typically absorb the full costs of research but may have to wait years for a product to hit the market and begin generating sales revenue. The tax credit softens the financial blow a bit, says state Sen. Mark R. Herring (D-Loudoun), who co-sponsored the bill with Del. Ben Cline (R-Rockbridge).
Although the amount per company is modest, it’s sufficient to help pay for research equipment costs, lab space, supplies and similar items, Herring says. It will “incentivize companies to invest in the research and development” needed to commercialize products and, ultimately, spur job creation and economic growth across Virginia.
The Northern Virginia Technology Council and the Virginia Biotechnology Association led an intense lobbying effort to get lawmakers to approve the R&D tax credit, which Gov. Bob McDonnell swiftly signed into law.
Virginia’s law piggybacks on a federal R&D tax credit signed into law by President Reagan in 1981. But the tax break is not a handout, says Josh Levi, vice president of policy for NVTC. “Think of it like a rebate on expenditures already made,” which companies recover if their current-year’s research expenditures eclipse the previous year.
Virginia’s approach is a different direction than that taken by most states. Giving a company cash to reinvest sends a much stronger message than simply letting them carry forward expenses year to year on a balance sheet, says Jay Langston, senior project support manager with the Virginia Economic Development Partnership.
“It’s not a huge sum of money, but if it helps a company pay for a piece of equipment, it’s a positive in their mind,” says Langston. Plus, it reinforces Virginia’s pro-business stance.
Should the applied-for tax credits exceed $5 million, the Virginia Department of Taxation would pro-rate the credits and assign them on a pro-rata basis. The idea is to prevent a handful of companies from quickly exhausting the available funds, Herring says. Conversely, the legislation allows companies to apply for an additional tax credit if the $5 million is not consumed, although officials concede that seems unlikely to happen.
The R&D tax credit generated the biggest headlines, but state technology companies have other news to celebrate as well. Lawmakers added $4 million to the Commonwealth Research and Commercialization Fund. It also provided $4 million for the Center for Innovative Technology’s “Gap” Fund, which provides seed funding to promising startups, and $2 million in matching funds for companies that win federal Small Business Innovative Research grants.