Tax Type
Corporation Income Tax
Description
Research and Development Expenses Tax Credit Fixed Base Percentage
Topic
Clarification
Computation of Tax
Credits
Date Issued
07-02-2013
July 2, 2013
Re: Research and Development Expenses Tax Credit Fixed Base Percentage
Dear *****:
This is in response to your letter to the Virginia Department of Taxation ("the Department") in which you request clarification regarding the calculation of a company's fixed base percentage for purposes of the Virginia Research and Development Expenses Tax Credit. When you filed ***** ("the Company's") application for the Research and Development Expenses Tax Credit, you computed the Company's fixed base percentage using Virginia qualified research and development expenses and total gross receipts for the two taxable years that the Company was in business. You request confirmation that this calculation is correct, rather than using only the Company's Virginia qualified research and development expenses and total gross receipts for the one taxable year the Company was in business in Virginia.
FACTS
The Company has been in business since 2010 and has been in business in Virginia since 2011. The Company submitted Form RDC, Application for Research and Development Expenses Tax Credit, for Taxable Year 2012. When computing the credit amount, the company calculated its fixed base percentage using its Virginia qualified research and development expenses and total gross receipts for Taxable Years 2010 and 2011, the two prior taxable years when the Company was in business.
The Department adjusted the amount of the Company's Research and Development Expenses Tax Credit for Taxable Year 2012 based on the fact that the Company was only in business in Virginia during Taxable Year 2011. The recomputed fixed base percentage used the Company's Virginia qualified research and development expenses and total gross receipts for Taxable Year 2011 only, since this was the only taxable year when the taxpayer was in business in Virginia.
DETERMINATION
Under Va. Code § 58-1-439.12:08, a taxpayer may claim the Virginia Research and Development Tax Credit in an amount equal to 15 percent or 20 percent of its Virginia qualified research and development expenses, to the extent that such expenses exceed its Virginia base amount. "Virginia base amount" is defined as the base amount as defined in IRC § 41(c) that is attributable to Virginia by (i) substituting "Virginia qualified research and development expense" for "qualified research expense," (ii) substituting "Virginia qualified research" for "qualified research," and (iii) substituting Virginia's formula for computing fixed base percentage for the federal formula.
As set forth in Va. Code § 58.1-439.12:08 A and in the Research and Development Expenses Tax Credit Guidelines, a taxpayer's fixed base percentage is determined:
- 1. By dividing the average amount of the taxpayer's Virginia qualified research and development expenses for the three taxable years preceding the year in which the tax credit is being claimed by the average amount of the taxpayer's total gross receipts for the three taxable years preceding the year in which the tax credit is being claimed; or
- 2. If the taxpayer has been in business for less than three taxable years, but for at least one taxable year, by dividing the average amount of the taxpayer's Virginia qualified research and development expenses for the number of years that the taxpayer has been in business by the average amount of the taxpayer's total gross receipts for the number of years that the taxpayer has been in business.
There is no requirement that these formulas be applied using only the taxpayer's Virginia qualified research and development expenses and total gross receipts for taxable years in which the taxpayer was in business in Virginia. In fact, these formulas must be applied using Virginia qualified research and development expenses and total gross receipts for taxable years in which the taxpayer was in business, regardless of whether the taxpayer was in business in Virginia. Accordingly, the Company correctly applied Virginia's formula for calculating fixed base percentage for Taxable Years 2010 and 2011 on its Taxable Year 2012 Form RDC.
CONCLUSION
For the foregoing reasons, the amount of the Company's Research and Development Expenses Tax Credit for Taxable Year 2012 will be adjusted using the corrected fixed base percentage. The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have additional questions, please contact ***** in the Office of Tax Policy, Policy Development Division, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
Rulings of the Tax Commissioner