State & Local Tax Blog

You May Qualify for R&D Exemption in MA

CCH alerted us to a revised exemption in MA, that you may qualify to recieve — check it out. Certain types of corporations can purchase TPP used directly and exclusively for research and development. Before you give up on this as a possible benefit for your company read on.
The new regulation issued by the MA DOR, 830 CMR 64H.6.4, provides a more detailed explanation of the requirements for an entity to qualify for the exemption. The exemption applies to a research and development corporation or a statutorily defined manufacturing corporation.
Corporation requirements

To qualify as a research and development corporation, an entity must meet the following four requirements:

(1) it must be either a domestic or foreign corporation;

(2) it must be engaged in research and development in the Commonwealth;

(3) its principal activity in Massachusetts must be research and development; and

(4) it must meet either a receipts test or an expenditures test.
So what constitutes “research and development”?
The definition of “research and development” has been amended to include a statement indicating that research and development are complete when the product, process, technique, formula, invention, or software can be readily reproduced for sale or commercial use.
What about this “Principal Activity” wording?
“Principal activity” means the predominant activity of a corporation in Massachusetts relative to its other activities in Massachusetts. The determination of a corporation’s principal activity is based on the facts and circumstances surrounding the corporation’s operations. An entity having a majority of its Massachusetts-based employees engaged in research and development will be presumed to meet this requirement.
Note that the test is whether the MA activity is predominantly R&D relative to other activities in MA, not relative to other activities everywhere. This is a big key.
What is the “Receipts Test”?

To qualify under the receipts test, more than two-thirds of a corporation’s Massachusetts receipts must be derived from research and development during the taxable year. For the computation, the numerator is the gross receipts from research and development performed in Massachusetts and the denominator is the gross receipts from all activities in Massachusetts.

What is the “Expenditures Test”?

To qualify under the expenditures test, more than two-thirds of a corporation’s Massachusetts expenditures must be allocable to its research and development activities during the taxable year. For this computation, the numerator is the corporation’s total Massachusetts expenditures that are allocable to research and development activities and the denominator is the corporation’s total Massachusetts expenditures. However, neither the numerator nor denominator includes the corporation’s manufacturing expenses or administrative expenditures.

Annual determination

The determination of whether an entity qualifies as an eligible research and development corporation or manufacturing corporation must be made on an annual basis for the applicable taxable year. A corporation that was not in existence in the previous year may utilize current information and reasonable projections of its business activity for its first year. In calculating an entity’s receipts or expenditures, a taxpayer must use the same taxable year and method of accounting used for federal income tax purposes.

For a corporation qualifying as a research and development corporation by virtue of meeting the expenditures test, the sales tax exemptions apply only to purchases made after Nov. 25, 2003.

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