The Missouri research and development (R&D) tax credit was reinstated as of January 1, 2023, clearing the way for more tax savings for businesses that engage in qualified research. Startups, particularly those engaged in R&D activity that qualify, should be aware of this change before they file their 2023 income tax returns.
Key Takeaways:
- The Missouri R&D tax credit can be applied to tax years beginning on or after January 1, 2023
- Of the $10 million yearly allotment for the tax credit, $5 million will be reserved for minority-owned, women-owned or small businesses
- The credit may be applied to qualified research, which Internal Revenue Code (IRC) Section 41 defines as research undertaken for the purpose of discovering information which is technological in nature and the application of which is intended to be of useful in the development of a new or improved business component of the taxpayer
- The credit is equal to 15% of the taxpayer’s “additional qualified research expenses”
- Taxpayers aren’t allowed to receive credit on any qualified research expenses that exceed 200% of the taxpayer’s average qualified research expenses incurred during the three immediately preceding tax years
Re-introducing the Missouri R&D Tax Credit
On June 30, 2022, Missouri Governor Michael Parson passed House Bill 2400, which contained a provision creating an R&D tax credit for the state of Missouri for the first time since 2004. The credit can be applied to tax years beginning on or after January 1, 2023. The credit will sunset on December 31, 2028, unless the benefit is extended.
The state has allocated $10 million for the credit to be annually distributed to qualifying Missouri businesses, including C corporations, flow-throughs and sole proprietorships. Of that total, $5 million is reserved for minority-owned businesses, women-owned businesses and small businesses. Under the new law, purchases of qualified R&D equipment are exempted from all state and local sales and use taxes if certain requirements are met.
How to Qualify for the Missouri R&D Tax Credit
To qualify for the tax credit, a company must be engaged in qualified research as defined by IRC Sec. 41. Qualifying research includes research activity performed to discover information which is technological in nature, and the application of which is intended to be useful in the development of new or improved business component. That includes any product, process, computer software, technique, formula, or invention used by the taxpayer in a trade or business, or which is “meant to be held for sale, lease or license,” as defined by IRC Section 41.
What Doesn’t Qualify for Missouri R&D Tax Credit?
Qualified research also refers to R&D performed to create a new or improved function, improve performance, reliability or quality of the taxpayer’s business component. Research related to style, taste, cosmetic or seasonal design factors does not qualify for the tax credit. The following research types also do not qualify for the Missouri R&D tax credit:
- Research that takes place after the business component has already reached commercial production
- Adaptation or duplication of existing business components
- Surveys, studies and any equivalent activity including management function or technique; market research, testing or development; routine data collection; or routine testing or inspection for quality control
- Foreign research conducted outside of the United States, the Commonwealth of Puerto Rico, or any other possession of the United States
- Research in social sciences, including art and the humanities
- Any research funded by a grant, contract, or by any person, including government entities
How is the Value of the Tax Credit Determined?
The credit will be valued at 15% of the difference between the taxpayer’s qualified research expenses in the current tax year compared to the average equivalent expenses incurred during the three tax years immediately preceding it. If the research activity is performed as a joint venture with a Missouri college or university, the credit rises to 20% of the average qualified research expenses over the average of the three previous tax years.
Qualifying businesses can receive up to a $300,000 credit, but no taxpayer should receive a credit exceeding 200% of the past three tax years’ qualifying research expenses. The tax credit must be claimed against income tax liability, but if the credit exceeds the tax liability, the excess credit may be carried forward for the next 12 following tax years or until the full credit has been applied, whichever comes first.
If the total eligible claims for the credit received during the calendar year exceed the annual cap of $10 million, eligible claimants will be issued credits on a pro rata basis. New businesses, defined as a business that is less than five years old, will be the first to receive full credits.
Qualifying as a Minority-Owned, Women-Owned or Small Business
As stated above, $5 million of the yearly $10 million allocation will be reserved for women-owned, minority-owned or small businesses. Small businesses are defined as a corporation, partnership, sole proprietorship or other business entity that is independently owned and employs 50 or fewer employees. Minority-owned and women-owned businesses are defined as follows:
- A sole proprietorship business owned and controlled by a minority or woman
- A partnership or joint venture owned and controlled by minorities or women where at least 51% of ownership interest is held by minorities or women, and the management and daily operations are controlled by one or more of the minority or women owners
- A corporation whose daily business operations are controlled by one or more minorities or women and that is at least owned by one or more minorities or women. If stock is issued, at least 51% of the stock is owned by one or more minorities or women
Why Startups Are Uniquely Positioned to Benefit
Startups typically have a smaller staff than traditional businesses, positioning them to benefit from the credits reserved for small businesses. Younger startups with less than five years are also set to be first in line to collect the full tax credit if eligible claimants exceed the annual $10 million cap.
Taking Advantage of Federal and State R&D Tax Credits
Now that Missouri has reintroduced the R&D tax credit, businesses can reap savings on both state and federal taxes. Missouri has made these dual savings even easier to achieve by using the identical research qualifications as the federal R&D tax credit. As such, qualifying for one tax credit likely qualifies you for the other. These vital decisions should be made under the guidance of an experienced advisor or CPA to ensure the best benefits possible for your business.
Anders Startups and Entrepreneurs group can advise businesses on their best track forward with the newly revived Missouri R&D tax credit. If you have questions about your business’ qualifications, contact an advisor below.
