Businesses that invest in research and development in Maryland may be entitled to an income tax credit. The total credits for all businesses may not exceed $9 million a year.
This credit is available for tax years beginning after December 31, 1999, but before January 1, 2020.
The credit may be taken against corporate income tax or State portion of the personal income tax. Sole proprietorships, corporations and pass-through entities, such as partnerships, subchapter S corporations, limited liability companies and business trusts may claim the tax credit.
Research and Development tax credits certified after December 15, 2012 are refundable for a "small business" to the extent that the tax credits exceed the income tax liability for that taxable year. A “Small Business” is defined as a for-profit corporation, limited liability company, partnership or sole-proprietorship with net book value assets totaling at the beginning or the end of the tax year for which the Maryland qualified research and development expenses are incurred, as reported on the balance sheet, less than $5,000,000.
To qualify for the credit:
The business must invest in research and development activities in Maryland during the tax year. The business must also submit an application for the credit to the Maryland Department of Commerce (DOC) by November 15 of the year following the tax years in which the Maryland qualified expenses were incurred.
In addition to submitting the application to DOC, small businesses must submit documentation showing they had net book value assets, at the beginning or end of the tax year, as reported on the balance sheet, of less than $5 million.
If the total Basic tax credits applied for in a tax year exceed $4.5 million, the businesses’ Basic tax credit will be prorated. If the total Growth tax credits applied for in a tax year exceed $4.5 million, the businesses’ Growth tax credit will be prorated.
DOC will certify the amount of credit available to the business by December 15.
How the credit is calculated:
There are two types of research and development tax credits available to businesses:
- Basic Research and Development Credit: 3% of the lesser of its Maryland qualified research and development expenses incurred during the tax year or the Maryland base amount, subject to statutory limits on the total amount of credits to all firms;
- Growth Research and Development Credit: 10% of the Maryland qualified research and development expenses incurred during the year that exceeds the Maryland base amount, subject to statutory limits on the total amount of credits to all firms.
The Maryland base amount is the average annual gross receipts of the business for the four preceding tax years multiplied by the Maryland base percentage. For most businesses, the Maryland base percentage is the percentage that Maryland research and development expenses for the preceding four tax years is of total gross receipts for those years.
If the credit allowed in any tax year exceeds the State income tax for that tax year, a taxpayer may apply the excess as a credit against the State income tax for succeeding tax year until the earlier of:
- The full amount of the excess is used;
- The expiration of the 7th tax year in which the Maryland qualified research and development expense was incurred; and
- The expiration of the 15th tax year in which the Maryland qualified research and development expense was incurred if the expense was incurred in a tax year prior to 2005.
An electronic tax return supporting Form 500CR must be filed to claim this credit against the Maryland income tax, for tax years beginning after December 31, 2012.
See Form 500CR Instructions for specific line-by-line instructions.
For qualified small businesses, the amount in excess of the state tax liability may be refunded.
Add Back required:
Whenever the Research & Development Tax Credits are claimed against the income tax, an addition modification must be made for the tax year in which the research and development expenses were paid.
A copy of the required certification from DOC must be included with the appropriate electronic return: Form 500X, the Maryland Amended Corporation Income Tax Return, or Form 502X, Maryland Amended Individual Income Tax Return or Pass-Through Entities Form 510. The Form 500CR section of the electronic amended return must also be completed.
Maryland Department of Commerce
Division of Business Development, Tax Incentives Group
World Trade Center
401 E. Pratt Street, 17th Floor
Phone: 410-767-6438 or 410-767-4980