Massachusetts R&D Tax Credit

For Massachusetts businesses in multiple industries looking to reduce tax liability.

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Documentation is often enough to suffice as proof of qualified expenses. Financial records, payroll records, and invoices are some of the documentation you need to support your qualified expenses.

The state of Massachusetts provides a research credit under 830 CMR 63.38M.1. R&D tax credits, also known as the Research and Development credit, enable Massachusetts businesses to potentially reduce their federal income tax. Taxpayers might qualify for the credit if they paid for (or incurred) qualified research expenses.

Under 830 CMR 63.38M.1, the Massachusetts research expenses are an amount equal to the sum of:

  • 10% of the excess of qualified research expenses for the taxable year over the Massachusetts qualified research base amount
  • 15% of the Massachusetts basic research payments for the taxable year


A few additional key elements of the Massachusetts R&D Tax Credit include:

  • The Massachusetts research credit is limited to 100% of the first $25,000 of corporate excise liability, in addition to 75% of the corporation’s excise liability that exceeds $25,000
  • The research credit can only be applied when a minimum tax of $456 exists
  • Either Massachusetts gross receipts or Federal gross receipts can be used when calculating the research credit
  • Eligible expenses include expenses that were incurred on or after January 1, 1991
  • Massachusetts allows for the research tax credit to be claimed on amended tax returns for the previous 3 years
  • Any unused credits can be carried forward for 15 years but are indefinite for tax credits capped by the 75% Excise Tax limitation


You can read more about the Massachusetts research credit here.

What are Qualified Research Activities and Expenses in Massachusetts?

Qualified Research Activities and Expenses can include the below and are defined by IRC section 41.
Wages:
Wages paid for qualified services performed in the state of Massachusetts.
Supplies:
Amounts paid for supplies that have been used or consumed in Massachusetts while conducting qualified research.
Computer Fees:
Amounts paid for the right to use computers located in Massachusetts.
Contract Research Expenses:
65% of amounts paid to other persons can be claimed as contracted research expenses to the extent attributable to research activity conducted at a research facility located within the state of Massachusetts.
Specific activity examples include:
Creating improved products, processes, formulas, software, and techniques
Automating or improving internal manufacturing processes
Designing tools, jigs, fixtures, and molds
Integrating new equipment
Development of data centers, big data, and data mining tools
Integration of APIs and other technologies
Development of financial or pricing models
Hiring outside consultants to perform any of the listed activities
Manufacturing new or improved products
Developing prototypes, first articles, models
Evaluation of alternative materials
Development of firmware
Network hardware and software development and optimization
Developing simulators
Development of risk management systems

Eligibility:
Massachusetts R&D Tax Credit

The MA is available to corporations subject to tax under M.G.L. c. 63, § 32 (domestic) and all corporations subject to tax under M.G.L. c. 63, § 39 (foreign).

Find out if you qualify for the MA research credit.

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How the R&D Tax Credit Works in Massachusetts

What Information is Needed?

Properly claiming the R&D tax credit in Massachusetts can be difficult without the right expertise - That’s where GOAT.tax comes in. Our R&D tax credit software identifies any qualified research expenses your company paid and qualified research activities to ensure you receive the largest refund possible.

Documentation can include Massachusetts gross receipts, Federal gross receipts, invoices, and any other records showing proof of qualified research activity.

Meeting the Four-Part Test

All companies in Massachusetts (regardless of industry, size, or revenue) that perform these qualified research activities must satisfy the following criteria of the IRS Four-Part Test as outlined in IRC §41(d):

1. Business Component Test
The activity must be related to the performance, quality, reliability, or new or improved function of a business component of the taxpaying company. A business component is defined to be “any product, process, software, technique, formula or invention used by the taxpaying company in trade or business.”
2. Technological Uncertainty Test
The activity must involve the elimination of uncertainty. An activity entails uncertainty if the taxpayer did not know one or more of the following:

  • Whether the desired results could be achieved.
  • The specific means of achieving the desired result.
  • The appropriate design of the business component is being developed.
    3. Process-of-Experimentation Test
    “Substantially all” of the activity must involve a “process of experimentation” involving more than one possible approach toward achieving the result, where the capability or method of achieving the result is uncertain at the outset of the activity.
    4. Technological‐in‐Nature Test
    Activities that are undertaken to discover information must be technological in nature. For example, experiments used to eliminate uncertainty must rely on principles of physical or biological sciences, engineering, or computer science.

    Credit Carryforward

    In Massachusetts, a credit carryover is available for 15 years but is indefinite for tax credits capped by the 75% Excise Tax limitation.

    R&D Tax Credit Calculation Method

    Massachusetts accepts two calculation methods when applying for the R&D Tax Credit:

    Regular Method: This compares your current R&D qualified expenses to historic R&D spending, looking at up to 10 years’ research spend against your total revenue.

    Alternative Simplified Method: This method compares current research spending to the prior three years of spending by the company. There are a few things to note with this method:

    2015 to 2017: The research credit will be equal to 5% of the taxpayer’s Qualified Research Expenses that are higher than 50% of the average Qualified Research Expenses for the previous 3 years.
    2018 to 2020: The research credit is 7.5% in excess of the taxpayer’s base amount for the previous 3 years.
    2021 and later: The research credit is 10% of the Qualified Research Expenses for the previous 3 years.


    How To Claim Your Massachusetts R&D Tax Credit

    To claim the Massachusetts research credit, corporations must complete Schedule RC. The form must be submitted with your Massachusetts Tax Return.

    Massachusetts R&D Tax Credit From The Experts: GOAT.tax

    GOAT.tax was created for the purpose of educating businesses on the R&D tax credit and assisting companies that qualify for the credit to claim it. Through the 305+ years of collective automating R&D tax credit experience across our nationwide team of over 50 R&D tax professionals, we have been able to take all the guesswork out of this complex tax credit incentive. The experts at GOAT.tax can help your business with automating R&D credit through our innovative platform.
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    Hire US-based engineers, developers, or scientists.
    Designs and develops product prototypes and/or software.
    Performs experimentation and validation on products, manufacturing processes, and/or software.
    None of the above.

    This calculator has been developed utilizing data from a variety of studies conducted in the industries listed. This is only an approximation based on a variety of assumptions and should be treated as such.

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