The research and development tax credit (R&D tax credit) is an incentive that financially rewards companies that make improvements to their industry or business. In addition to the federal research and development tax credit, many states also offer R&D tax credits to incentivize businesses to come to or increase investment in that state. This may come in the form of income tax credits that closely mirror the federal tax credit or related tax credits.
Does your company operate in a state that could reward you for things you’re already doing? Each state is different, so it’s beneficial to know how and if your company can save through R&D. Here’s an overview of the R&D tax credits offered by eight Southeastern states.
Alabama R&D Tax Credit Information
Alabama does not offer a research and development tax credit.
Florida R&D Tax Credit Information
Florida offers an R&D tax credit only to C-corporations. This is because Florida’s income tax only applies to C-Corporations—not to other business entities.
Florida generally follows the federal definitions and calculations of qualified research expenses. However, the activities must occur within the state of Florida and be in a targeted industry. Targeted industries include:
- Aviation and Aerospace
- Cloud Information Technology
- Homeland Security & Defense
- Information Technology
- Life Sciences
- Marine Sciences
- Materials Science
Additionally, the credit is generally only available for new spending. It is equal to 10% of qualified expenses over the base amount where the base amount is the average of the previous four years’ research expenditures. Further, the credit is capped at 50% of the corporation’s tax liability.
Finally, there is a statewide cap of $9 million in credits each year unless the state increases the limit for a specific year. Corporations must apply to receive an allocation of this amount to receive the credit.
Georgia R&D Tax Credit Information
Georgia’s R&D tax credit applies to all business entities. For pass-through entities that do not pay separate state income taxes, the credit is apportioned to the shareholders for use on their personal tax returns.
Georgia generally follows the Internal Revenue Service’s (IRS) definitions for qualified expenses and grants a credit of 10% over a base amount. The base amount is calculated based on the ratio of Georgia revenues to qualified expenses for the previous three years.
The credit is first used towards up to 50% of the company’s income tax liability. The remaining portion may be carried forward for up to 10 years or applied towards payroll taxes.
Louisiana R&D Tax Credit Information
Louisiana also has a research and development tax credit available. The credit percentage is based on the number of Louisiana employees and ranges from 5% – 30% of the excess qualifying expenses that exceed the base amount. C-Corporations, S-Corporations, LLCs and Partnerships are eligible to take advantage of the credit. Louisiana also allows a five-year carryforward for unused credit amounts.
Mississippi R&D Tax Credit Information
Mississippi does not offer a research and development tax.
North Carolina R&D Tax Credit Information
North Carolina repealed its state research and development tax credit in 2016. Businesses with previous year carryovers are still able to use any remaining portion of the credit.
South Carolina R&D Tax Credit Information
South Carolina offers a much simpler calculation than some other states that offer a research and development tax credit. It is equal to 5% of expenses that meet the requirements for the federal R&D tax credits and occurred within the state of South Carolina. The credit is limited to 50% of the business’s tax liability and can be carried forward up to 10 years.
Tennessee R&D Tax Credit Information
Tennessee does not offer a research and development tax credit.
Things to Remember about State R&D Credits
- Even if a state that your company does business in does not have a research and development tax credit, remember that you may still be eligible for federal tax credits.
- Finally, even though most states’ R&D tax credits have similar definitions to the federal credit, there are slight nuances that vary by state and may change from year to year.
Talk to Your Advisor
The research and development tax credit is complex. The federal R&D tax credit and those offered by states can vary and have different impacts on a company. To evaluate where your company may be able to save on taxes and how you may be able to use tax credits like R&D to boost your company’s bottom line, the best step is to talk with your advisor about any opportunities that you could be taking advantage of but may not be.
Warren Averett’s tax professionals can help you determine if you have eligible expenses and how to best use the credit to improve your profits and cash flows. You can begin by utilizing our free Quali-Finder™ diagnostic tool, which may help you identify tax credits and incentives for your company.