The Georgia research tax credit rewards taxpayers who engage in the manufacturing, warehousing and distribution, processing, telecommunications, broadcasting, tourism, and research and development industries.
Qualified Research Activities
Most state research tax credits incorporate or are based on the definition of qualified research activities in the federal research tax credit. The federal research tax credit defines qualified research activities using a four-part test. It also includes several limitations. A handful of state research tax credits only adopt some of the federal requirements and very few or none of the exclusions set out in federal law. A few states implement custom definitions. In addition, the research tax credits for most states are limited to research activities that occur within the state. A few state statutes limit their tax credits to activities performed within specific geographic areas within the state.
The Georgia research tax credit does not define the term qualified research activities. Instead, it merely requires taxpayers to have claimed and be allowed a federal research tax credit for the year. If this requirement is satisfied, the taxpayer’s expenses must meet the definition of qualified research expenses.
Qualified Research Expenses
Most state research tax credits incorporate or are based on the definition of qualified expenses in the federal research tax credit statute. For purposes of the federal research tax credit, qualified research expenses can include wages, contractor, supply, and computer rental expenses. Other states have custom definitions of what expenses are qualified. In addition, the research tax credits may be limited to expenses incurred within the state or certain geographic areas within the state.
The Georgia research tax credit adopts the federal definition of qualified research expenses. It limits it to expenses in the manufacturing, warehousing and distribution, processing, telecommunications, broadcasting, tourism, and research and development industries. Also, for wages paid and purchases of services and supplies, the credit is limited to those that are for research conducted within Georgia.
Definition of Gross Receipts
The research tax credits many states is computed by comparing the taxpayer’s qualified research expenses to their gross receipts for one or more years. For example, the federal research tax credit compares the taxpayer’s qualified research expenses in the current year with its gross receipts for the prior four years. The gross receipts may be limited to receipts or income from property owned or from business conducted in the state or those derived from the sale of property that is sold to customers in the state.
The Georgia research tax credit defines gross receipts using an apportionment factor. This factor equals the taxpayer’s gross receipts from operations within Georgia over the taxpayer’s total gross receipts, multiplied by the taxpayer’s total gross receipts.
Research Tax Credit Percentage
Research tax credits are often a percentage of the taxpayer’s qualified research expenses. The percentage varies from state to state; generally ranging from 1 to 20 percent. The Georgia research tax credit equals 10 percent.
Research Tax Credit Dollar Limitation
A number of states impose a dollar limit on the amount of expenses that can qualify for the research tax credit. Other states limit the amount of their research tax credits that taxpayers can claim in any one tax year.
The Georgia research tax credit available in any one year is limited to a maximum of 50 percent of the taxpayer’s Georgia income tax liability. Amounts in excess of 50 percent of the taxpayer’s Georgia income tax liablity can be carried forward or, if the taxpayer has only been conductingn business in Georgia for five or fewer years, taken as a credit against the taxpayer’s quarterly or annual Georgia employment tax liability.
Incremental or Non-Incremental Research Tax Credit
Most state research tax credits are incremental. This refers to the credit being conditioned on the taxpayer increasing its research spending in the credit tax year and some specific prior tax year or years. The prior tax years are often referred to as the “base period.” Many states adopt the federal base period tax years of 1984 through 1989, or later years if the taxpayer did not exist or began its research activities after 1991. Other states identify a number of years prior to the credit year as the base period tax years. A few states have non-incremental research tax credits which simply reward taxpayers for incurring qualified research expenses.
The base period for the Georgia research tax credit is the three-year period prior to the credit year.
Research Tax Credit Carryback and Carryforward
Most states allow unused research tax credits to be carried back and forward for one or more tax years and forward indefinitely. These credits can then be used to reduce tax liabilities in the other tax years. Other states require research tax credits to be used within a set period of time. Research tax credits not used within this time simply expire.
The Georgia research tax credit cannot be carried back; however, unused credit can be carried forward for ten years.
Refundable Research Tax Credit
A few states have refundable research tax credits. Refundable tax credits can be used to obtain a refund of taxes even if the taxpayer is not obligated to pay any tax to the state. Non-refundable tax credits can only be used to reduce the taxpayer’s state tax liability.
The Georgia research tax credit is not refundable.
Some states only allow taxpayers research tax credits if they create and retain specific documents. This may require the taxpayer to develop and retain records that identify the taxpayer’s research expenses and, in some cases, the research activities. Other states expressly or implicitly adopt the general documentation requirement for the federal research tax credit. This general requirement essentially says that the taxpayer is to keep sufficient records to substantiate its research tax credits. It does not identify any specific documents that must be developed or retained.
The Georgia research tax credit does not identify any specific substantiation requirements.
- Georgia Revenue & Taxation Code, § 48-7-40.12
- Georgia Dept. of Rev. v. Georgia Chemistry Council, Inc., 607 S.E.2d 207 (Ga. Ct. App. 2004)