HB 2043 — Research and development expenses; increases tax credit.

SESSION INTRODUCEDHOUSE 23102865DSUBSTITUTE I23105705D HOUSEAMENDMENT IN THE NATURE OF A SUBSTITUTE (Proposed by the House Committee on Finance on February 1, 2023) (Patron Prior to Substitute––Delegate Shin) A BILL NO.to amend and reenact §§ 58.1-439.12:08 and 58.1-439.12:11 of the Code of Virginia, relating to research and development expenses tax credits.

2043Be Offeredit Januaryenacted 11,by 2023the NGeneral PrefiledAssembly Januaryof 10,Virginia: 2023 T A Band development expenses;

aggregateas increase.thefollows:58.1-439.12:08 and 58.1-439.12:11 of the Code of Virginia,Virginia relatingare toamended taxand credit;reenacted § 58.1-439.12:08.

rRsearchResearch –––––––––– Patrons––Shin and Bennett-Parkerdevelopment Oexpenses ––––––––––tax Dcredit. Referred to Committee on Finance –––––––––– U Be it enacted by the General Assembly of Virginia:

C 1.

That § 58.1-439.12:08 of the Code of Virginia is amended and reenacted as follows:

E "Virginia base amount" means the base amount as defined in § 41(c) of the Internal Revenue Code, as amended, that is attributable to Virginia, determined by (i) substituting "Virginia qualified research and development expense" for "qualified research expense";

(ii) substituting "Virginia qualifiedqualifieO research" forfor1. "qualified research";

The percentage that the Virginia qualified research and (iii)development insteadexpense for the three taxable years immediately preceding the current taxable year in which the expense is incurred is of "fixedtheU basetaxpayer's percentage,"total using:gross receipts for such years;

or 2.

The percentage that the Virginia qualified research and development expense for the appliSable number of taxable years immediately preceding the current taxable year in which the expense is incurred is of the taxpayer's total gross receipts for such years, for the taxpayer that has fewer than Ehree but at lea"Virginia gross receipts" means the same as "gross receipts" as defined in § 58.1-3700.1.

"Virginia qualified research" means qualified research, as defined in § 41(d) of the Internal Revenue Code, as amended, that is conducted in the Commonwealth.

S "Virginia qualified research and development expenses" means qualified research expenses, as defined in § 41(b) of the Internal Revenue Code, as amended, incurred for Virginia qualified research.

B.

TheFor percentagetaxable thatyears beginning on or after January 1, 2011, but before January 1, 2021, aBtaxpayer (i) 15 percent of the first $300,000 in Virginia qualified research and development expenseexpenses forpaid oral to incurred by the threetaxpayer during the taxable yearsyear immediatelyor preceding(ii) 20 percent of the currentfirst $300,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year if the Virginia qualified research was conducted in whichconjunction thewith expensea ispublic incurredor isprivate institutiIn of 35 higher education in the taxpayer'sCommonwealth, totalto grossthe receiptsextent forthe suchexpenses years;exceed the Virginia base amount for :

or36 number of taxable years immediately preceding the currenttaxpayer. taxable year in which the expense is incurred is of the taxpayer's total gross receipts for such years, for the taxpayer that has fewer than three but at least one prior taxable year.

0T "Virginia38 grossshall receipts"be meansallowed a credit against the sametax aslevied "grosspursuant receipts"to as§ defined58.1-320, 58.1-400, or 58.1-1202 in §an 58.1-3700.1.39 amount equal to (i) 15 percent of the first $300,000 in Virginia qualified research and development 40 expenses paid or incurred by the taxpayer during the taxable year or (ii) 20 percent of the first $300,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer duringEthe taxable year if the Virginia qualified research was conducted in conjunction with a public or private institution of higher education in the Commonwealth, to the extent the expenses exceed the Virginia base amount for the taxpayer.

3taxpayer, "Virginiathe qualifiedcredit research"otherwise meansallowed under this section shall be computed under this subsection and shall equal 10 percent of the difference of (i) the Virginia qualified research,research asand defineddevelopment inexpenses §paid 41(d)or incurred by the taxpayer during the taxable year and (ii) 50 percent of the Internalaverage RevenueVirginia Code,qualified asresearch amended,and thatdevelopment isexpenses conductedpaid inor incurred by the Commonwealth.taxpayer for the three taxaHle years immediately preceding the taxable year for which the credit is being determined.

"VirginiaIf qualifiedthe researchtaxpaye2 anddid developmentnot expenses"pay meansor incur Virginia qualified research expenses,and asdevelopment definedexpenses in §any 41(b)one of the Internalthree Revenuetaxab4e Code,years asequal amended,five incurredpercent forof the Virginia qualified research.research and development expenses paid or incurred by the taxpayer during the relevant taxable year.

shall1 be2. allowed a credit against the tax levied pursuant to § 58.1-320 or 58.1-400 in an amount equal to (i) 15 percent of the first $300,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year or (ii) 20 percent of the first $300,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year if :

35The aggregate amount of credits allowed to each taxpayer under this subsection shall not exceed $45,000 for the taxable year, except that the aggregate amount of credits allowed to each taxpayer shall not exceed $60,000 for the taxable year if the Virginia qualified research was conducted in conjunction with a public or private institution of 36 higher education in the Commonwealth,Commonwealth toor thea extentprivate theinstitution expensesof exceedhigher theeducation Virginiain base amount for 37 the taxpayer.Commonwealth.

38HB2043H1 2.2 of 4 D.

For taxable years beginning on or after January 1, 2021, but before January 1, 2025, a taxpayer amount equal to (i) 15 percent of the first $300,000 in Virginia qualified research and developmentan expenses paid or incurred by the taxpayer during the taxable year or (ii) 20 percent of the first $300,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year if the Virginia qualified research was conducted in conjunction with a public or private institution of higher education in the Commonwealth, to the extent the expenses exceed the Virginia base amount for the taxpayer.

C.

1.

Effective for taxable years beginning on or after January 1, 2016, at the election of the taxpayer, the credit otherwise allowed under this section shall be computed under this subsection and paid or incurred by the taxpayer during the taxable year and (ii) 50 percent of the average Virginianses qualified research and development expenses paid or incurred by the taxpayer for the three taxable years immediately preceding the taxable year for which the credit is being determined.

If the taxpayer did not pay or incur Virginia qualified research and development expenses in any one of the three taxable years immediately preceding the taxable year for which the credit is being determined, the tax credit shall equal five percent of the Virginia qualified research and development expenses paid or incurred by the taxpayer during the relevant taxable year.

2.

The aggregate amount of credits allowed to each taxpayer under this subsection shall not exceed not exceed $60,000 for the taxable year if the Virginia qualified research was conducted in conjunctionl HB2043 2 of 3 with a public institution of higher education in the Commonwealth or a private institution of higher education in the Commonwealth.

D.

For taxable years beginning on and after January 1, 2023, the total amount of credits granted for each fiscal year of the Commonwealth beginning with fiscal year 2024 shall not exceed $10$15.77 million.

The Tax Commissioner's annual report to the Governor on revenue collections by tax source shall include (i) the total number of applicants approved for tax credits pursuant to this section for the of 3 applicable tax year and (ii) the total amount of such tax credits approved for the applicable tax year.

theL. number of full-time employees employed by the taxpayer in the Commonwealth during the taxableding (i) year for which the credit is sought;

(ii)The theDepartment taxpayer'sshall sectorrequire ortaxpayers sectorsapplying accordingfor to the 2012credit editionto ofprovide theinformation Northincluding American(i) Industryof Classification4 Systemyear (NAICS)for aswhich published by the Unitedcredit Statesis CenTussought; by the taxpayer;

(iv)(ii) the totaltaxpayer's grosssector receipts or anticipatedsectors totalaccording grossto receiptsthe 2012 edition of the taxpaRerNorth forAmerican theedIndustry taxableClassification yearSystem for(NAICS) whichas published by the creditUnited isStates sought;Census Bureau;

(iii) a brief description of the area, discipline, or field of Virginia qualified research performed by the taxpayer;

(iv) the total gross receipts or anticipated total gross receipts of the taxpayer for the taxable year for which the credit is sought;

UM. development expenses are paid for or incurred by a taxpayer for research conducted in theresearCh and Commonwealth on human cells or tissue derived from induced abortions or from stem cells obtaineE from human embryos.

No tax credit shall be allowed pursuant to this section if the otherwise qualified research and development expenses are paid for or incurred by a taxpayer for research conducted in the from human embryos.

D§ B58.1-439.12:11. 3